Katy Perry, pink latex, death metal and Gordon Brown

I was going to write something about Gordon Brown topping out the league of the world's most devastating rogue traders but then I got side tracked. Sorry! I hope this is suitably weird recompense.

Gunfire, nazis, randomness, statistical analysis and a mediocre Iron Maiden song

Apologies, linking up somebody else's nifty work hardly qualifies as a post, but I'm just too knackered for a proper rant today. At any rate, I love this piece. If you ever thought statistical analysis was irredeemably boring, this should change your mind. Or maybe not.

And here's a picture of Eddy...can't believe it's taken me until now to get one up!

Goldman Sachs doing God's work. Or something like it.

This is just so deliciously fucked up, I don't have any further comment.

Drain you of your sanity; face the thing that should not be! – On the retardedness of the inverted CDS curve

Restating your PnL? WTF!!!

We all know (or should know by now) that when the revolution finally comes all manner of folks will be put against the wall. Now, the big fear I have is that no one is going to ensure that risk managers are rounded up and get their dose of revolutionary fervor. The problem is that it’s just that is an occupation so obscure that the average neo-communist revolutionary / not-so crypto idiot with an AK-47 will simply fail to spot what reactionary fiends of the night / capitalist technocrat lackeys risk managers really are.

But why the special attention to risk managers I hear you ask? What makes them so deserving of revolutionary wrath? Well, basically because they don’t really do their job! The point of a risk managers’ existence is ostensibly to ensure that a bank’s risk book is run within parameters that ensure the risk reward ratio is acceptable and that book is actually valued sensibly in accordance with a pricing policy. And that’s exactly what I’m going to moan about today. The fun and games that kept all manner of financial type and politicians awake over the last couple of weeks have given ample illustration that these risk books are still very much marked not to some rational or even just explicable standard but basically marked to some make believe figures that ensure we all get paid at the end of the year.

The proof? Enter the retardedness that is the inverted CDS curve. Basically, in financial market parlance an inverted CDS curve is taken to be a reasonably sure-fire sign that a financial entity (i.e. the one the CDS in question relates to) is in DIRE TROUBLE and likely to IMPLODE. Why? What does that all mean? Well, a CDS curve consists of a series of points (spreads) that express the expected default risk of a financial entity between now and a future point in time. In more orderly times a CDS curve is upward sloping, that is the spreads (and with it the implied likelihood of default) increase the further your time horizon reaches into the future. Which kind of makes sense. All things being equal the second law of thermodynamics (among a few other things) would indicate that the longer something goes on the more likely things are to fall apart. So what happens when markets are in distress? The reality is that when sentiment turns against somebody (like the US Government during the unspeakably childish debt ceiling squabble in Washington DC) you’ll find it hard to execute trades with longer dated maturities. People simply don’t want to take on the risk of longer maturities. At the same time the nearer dated maturities (that you still can get a quote for) will command a higher risk premium, so the spreads will rise. Now, by convention the maturities for which you can’t get a new price will be simply be staled (carried forward from whenever you last got a quote for them) while the shorter maturities for which you still can get a quote will rise. So what can happen in this particular scenario is that you can get an ‘inverted’ CDS curve, where the nearer dated maturities have a likelihood of default that is higher than the further dated ones. Fair enough you say? You might think so; after all it would look like you are making use of the most recent data that you have to build that curve. So what’s the harm? The harm is that those curves are used to price existing CDS transactions on banks’ books and that’s just plain retarded. Think about it: the risk of a default occurring between now and a future date as expressed by a CDS spread is a non-Bayesian event. The timeline observed for the determination of a credit event (default) is continuous and once the event occurs it will trigger ALL Credit Default Swaps that are referencing this particular reference entity. So there is something deeply and disturbingly wrong with a situation where you have a curve that would imply that the one-year default risk of a company is lower than the five-year default risk of the same company. While I agree that this topic has distinct overtones of needless sophistry / intellectual masturbation about it, it actually is a pretty good indication of what is wrong with modern finance. It’s a bit like that early morning nose-bleed so prevalent among punk bankers and almost-made-it rock stars; not exactly shocking in its on right but clearly indicative of a big old problem. Something is indeed rotten.

James Hetfield totally rocks!

So, to come back to my point about why risk managers need to be brought to the front of the queue when the masses rise up against the system: What does that have to do with inverted CDS curves? It’s simple, it’s those guys that are using just those curves to value the credit books, thus plainly misstating the true value of said book (or lack thereof!). Strangely enough there is zero outcry over such egregious use of sleight of hand accounting to give the illusion of greater stability in the financial system than there really is. I doubt that is because the issue is too difficult to grasp. It really isn’t. But it is sufficiently obscure to be swept under the carpet. It’s not exactly something Robert Peston will be able to blitz the BBC Newsnight viewers with in a 90 second sound bite designed to excoriate bankers and whip incredulous middle-class viewers into a frenzy of polite incredulity. In a nutshell, if your job is to manage risk, you probably shouldn’t be in the business of downplaying the volatility of a risk book. But then again that’s probably saying more about the way incentive compensation is calculated than what is truly sane. Never mind. Move on, nothing to see here. Go back to shopping for some Apple products.