News about the economy has gone from apocalyptic to merely bad. Stock indexes and commodity prices have been on a five month tear. Hints are showing up that at least the worst of the home mortgage disaster might be over. Unemployment is still at scary levels, but at least the rate of its increase is slowing.

All in all, it would seem that maybe the Fed printing a stack of dollars one trillion high and throwing it at the banks might actually be working, if by “working” one means a long-term debasing of the currency to get a short-term boost in the economy, though I doubt B. Bernanke would explain it in precisely those terms. However, there is another major jolt on the way for credit markets, banks, and, by extension, the rest of the economy: commercial real estate. (more…)

Every now and then I run across some important finance type saying something so patently crazy, such a complete howler, that it just stops me little brain. The most recent one of these was from Myron Scholes in the New York Times magazine this weekend. The theme of the mag was ‘debt’ in various forms, and Scholes was the subject of a snappy, short interview where he made the comments that put me on the floor.

First, though, who is Myron Scholes? Well, he’s a nerd’s nerd, the co-creator of the Black-Scholes model for pricing derivatives, for which he won the Nobel Prize in economics. After years as an econ professor he was invited along with a number of other finance nerds to build their very own hedge fund, the spectacularly misnamed Long Term Capital Management (LTCM for those in the know), which was founded in 1994 and went bust four years later. LTCM was initially famous for spectacular returns and legendary secrecy about their trades, using multiple brokers to hide their methods even from the people accessing the markets for them. (more…)

The results are in and, completely and utterly to no surprise at all, the US banking system is in decent fundamental shape. Yup, Dr. Geithner and Nurse Bernanke had the 19 largest banks in the US drop trow, grabbed their balls, told them to turn their heads and cough, and pronounced them in more or less good health. $74 billion short of rude, independent vigor perhaps, but short nothing more than a run of penicillin here and a couple of aspirin there. As needed. Of course it was only last September, when Lehman was allowed to fail for the unforgivable sin of not being Goldman Sachs, that US banking was well and truly on the brink of collapse, with the electronic/institutional equivalent of a run on the system. Since then we have heard nothing but a relentless stream of bad news about the US and world economy. But, carry on folks, nothing to see here. All is well.

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One of the things Wall Street does best is confuse people. They are brilliant at it, making simple things seem complex. So today we’re going to go over one of the things they’re trying to make obscure and make them simple—‘credit default swaps.’ A credit default swap is nothing more complex than insurance. I pay an insurance company roughly $600 every six months and if I crash my car they have to pay for it. I’m paying them a certain premium to assume the risk of me crashing my car. CDS is the same thing, but for bonds. I’m paying someone to assume the risk of my bonds not being paid off. I strike a deal with Party X and they agree that if Company Y goes busto and defaults on their debt Party X will pay me the face value of the bonds that Company Y issued. Simplest fucking thing in the world, it’s bond insurance. Why does Wall Street bother to make up a weird name? (more…)

There aren’t a huge number of constants in the world of finance. First of all, that word, finance, includes a guy sitting in a cube cold-calling retirees while he’s working at Fidelity. It also includes Larry Fink, the CEO of Blackrock, who runs a firm of over 3000 people with (even now) over a trillion dollars of other peoples’ money he’s running. However, there are a few constants. Most of us make a decent living (just so you don’t quit reading, I’m easily in the bottom 25% of this business, I’m a computer programmer at a small fund and they can always threaten to send my job to Bangalore, which the probably would if it weren’t an annoyance to do so). All of us know people who make way, way more money than we do. We’d like to have their jobs. We’re all scared to death we’re going to blowup and go broke. (more…)