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谢国忠

谢国忠博客:只说出心中真相

 
 
 

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麻省理工学院经济学博士

个性介绍: 1960年出生于上海,1983年毕业于上海同济大学路桥系,1987年获麻省理工学院土木工程学硕士,1990年获麻省理工学院经济学博士。同年加入世界银行,担任经济分析员。在世行的五年时间,谢国忠所参与的项目涉及拉美、南亚及东亚地区,并负责处理该银行于印尼的工商业发展项目,以及其他亚太地区国家的电讯及电力发展项目。1995年,加入新加坡的Macquarie Bank,担任企业财务部的联席董事。1997年加入摩根士丹利,任亚太区经济学家,2006年9月辞去该职务。

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all enron's children   

2008-03-20 21:52:31|  分类: 言论 |  标签: |举报 |字号 订阅

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All Enron's Children(译文在这里)

谢国忠搜狐博客 http://xieguozhong.blog.sohu.com/

The credit bubble was a scam to begin with. The people who piled inwith their firms' or investors' money mostly knew what was going on.Most people probably disagree with me now. Time will tell. The Fed isnow taking credit risk on failing financial institutions. It may end upowning most of the financial system. Without capital of its own, itwill have to print money to cover the capital losses, i.e., monetizingthe losses. It will lead to monetary expansion, falling dollar, andinflation. I believe that the last asset class to adjust is treasuries.The treasury yield should be 6.5%, not 3.5%. The following article isin the current issue of Caijing Magazine. The Chinese version is in theattachment. Best wishes, Andy

All Enron's Children

Allbooms are the same, all bursts are different. Rising asset prices is atthe heart of every boom; money seems to grow on trees. Every boom isfollowed by a financial crisis. In 2001, the value of two trilliondollars that were invested in creating telecom and other IT facilitiesvanished in their declining pricing power. Investors relearned thelesson that technology was wonderful for productivity but not very goodfor profit. In 1998, overcapacity destroyed the export earnings of theAsian economies. Their foreign creditors wanted their money back then,causing a currency-cum-banking crisis. Developing economies all overthe world learnt the lesson that creditors wanted their money back justwhen they needed it most. In 1994, the rising US interest rate sappeddemand for the dollar-denominated bonds that the Mexican governmentissued. The liquidity crisis caused its currency to collapse in value.A few years earlier, the Japanese property market collapsed. Saddledwith bad debts, Japanese banks stopped lending and the Japanese economybegan its lost decade. The list can go on and on. The root cause of afinancial crisis is asset overvaluation during a boom. Of course, assetovervaluation is possible when there is money chasing the rising trendsin asset prices. When asset prices reverse, the money that chasedvanishes in value. Whose money is lost has endless possibilities. Thatis why every financial crisis is different.

Therewas a unique story during the last burst. Enron, a boring natural gassupplier in Houston during the 1980s, surged in prominence in the1990s. The secret was in its trading in commodity market. As a naturalgas supplier, it should hedge its contracts with its customers. Naturalgas price fluctuates everyday. If a customer wants fixed price fortwelve months or longer, the supplier is exposed to the pricefluctuation. Hence, it should buy futures in the market to hedge itsrisk. Energy suppliers like natural gas or oil companies usually gothrough Wall Street firms to hedge the risk. Enron deviated from thismodel and began trading on its own in 1989, i.e., it was competingagainst the Wall Street, and it found out that the business was veryprofitable. Its high profitability came from the fact that it waseffectively a bank without being subject to banking regulations. A bankmust meet the capital requirement of 8% of assets under BIS rules andmust follow regulations on what it can and cannot do. As an industrialfirm, Enron didn't have to follow such rules. Hence, it was taking thesame risks as banks without the capital requirement. The CEO then, KenLay, saw the profits from the trading business dwarfing its business ofsupplying natural gas. In 1990, he hired Jeffrey Skilling, a partner atMcKinsey Consulting, to focus the firm on commodity trading,effectively turning the firm into a hedge fund.

Youmay have heard colorful stories about the famous traders on Wall Streetwho make hundreds of millions of dollars for their firms and pockettens of millions for themselves. They are the highest paid people onWall Street, paid much more than their CEOs. There is an aura aroundthe successful traders. In the past three years, they have been leavingWall Street firms to start their hedge funds. The star power of some ofthe traders could pull in billions of dollars with three years oflockup for their funds. As they charge 2% management fee, they makehundreds of millions of dollars without lifting a finger on day one. Dostar traders have special talents like Michael Jordan and Tiger Woodsand deserve the showering of so much free money? Unfortunately, I havenot met one. The success of an average trader comes from sellingvolatility insurance in the market. Luck explains the successes of moststar trader. I am sure that traders would consider my opinions on thematter sour grapes from someone who didn't make tens of millions likethem. I can never explain away this accusation. But, I can fill mystory with reasonable substance.

Traderstalk about their trading strategies with colors like butterfly,straddle, gamma hedging, etc. All those strategies boil down to onething: short volatility. Volatility is a fundamental fact in life.There could be an earthquake tomorrow. You might fall down and breakyour legs walking on the street. Volatility is a negative for life,i.e., making $100 per month is better than making non for eleven monthsand $1,200 during a random month in a year. Economists call this humannature risk aversion. This risk aversion is the foundation of theinsurance business. For example, you might be willing to make less than$100 every month to be equally well off than making $1,200 during onerandom month in a year. The insurance company can offer you thismonthly amount and collect $1,200 when it happens randomly during theyear. The difference between $1,200 and the total that you collect in ayear is the profit for the insurance company.

Similarly,you can buy insurance against being hit by a bus. An insurance companyoffers such service to millions of people. If each person has onemillionth chance of being hit by a bus in one year, the law of largenumbers says that the insurance company will almost surely have oneperson claiming payment in a year due to such an accident if it insuresone million people. Let's say the damage from such an accident is onemillion dollars. As people are risk averse, they should be willing topay more than one dollar to insure against such an accident. Theinsurance company makes a profit from collecting more than one dollarfrom each person and paying out one million to the person hit by a bus.

Stockmarket fluctuates every day. You can buy insurance too. The extremecase is to hold cash. The other extreme is to hold shares without anyhedging as most people do. In-between, you can choose the whole gamutof being exposed to the market. For example, you can choose not toloose more than 10%. Of course, every benefit comes with a price. Youhave to sacrifice how much upside you would give up in exchange for thedownside protection. Some funds offer principal protection and someexposure to upside. What they do is actually to deposit your money inan interest bearing bank account and use the interest rate income tobuy derivatives that are exposed to the upside. You can never getdownside protection without sacrificing upside potential. Financialinstitutions that offer such products play on your nature of riskaversion. Of course, they make a profit from the actual cost of suchfinancial products and your willingness to pay.

WallStreet traders make profits most of the time by selling products thatoffer insurance. They lose money from time to time and make money fromtime to time. As they offer a valuable product to the market, they makemoney on average. Of course, like a real insurance company, they needcapital to be in this business. Each trader is given certain amount ofcapital by his firm. He optimizes the usage of the capital by offeringdifferent financial products in the market. Like other products,financial products can become over or under priced. The basic skill ofa trader is not to make the stupid mistake of selling undervaluedproducts. The basic pricing tool for derivative products is theBlack-Scholes formula that links the prices of derivative products toasset prices, sort of like the formulae for calculating the price ofsausage from the price of pork.

TheBlack-Scholes formula, however, is the most misused tool in financialmarket. When a sausage manufacturer prices its sausage based on porkcost, its price would not feed back to influence pork price. Infinancial markets, when too many traders sell volatility, they causevolatility to drop temporarily. As more and more players get insurance,they don't respond to change in information as sensitively as beforeand, hence, market becomes less volatile. The formula says that theprice of insurance should drop, which makes the trade more profitableand, hence, more traders sell or short volatility. It brings downvolatility further. However, such suppression of volatility fromliquidity supplied by traders is artificial. When a shock triggerstraders to buy back volatility, the rush for exist causes a big wave inthe market, which balances off the low volatility period before, i.e.,fundamental volatility has not changed just carved up differently dueto the presence of traders. The 1987 market crash, for example wasprobably caused by such an event (see 'A Demon of Our Own Design', byRichard Bookstaber).

Some traders go theother way and bet on a break in trend. The most famous example isGeorge Soros betting on the pound sterling pulling out the EuropeanMonetary Union ('EMU'). The United Kingdom was experiencing balance ofpayment ('BoP') deficits then. EMU is a fixed exchange rate regime.When a country hemorrhages BoP deficit, its fixed exchange rate regimeis not sustainable. It can either raise interest rate to cut domesticdemand or devalue to boost exports. George Soros bet on the later. OnSeptember 16, 1992, the British government decided to pull out EMU.George Soros' fund made $10 billion on that day and George Soros becamea household name around the world. Many hedge funds bet on the same in1998 during the Asian Financial Crisis. They won in Thailand and Koreabut lost in Malaysia and Hong Kong. In such bets, it involves ajudgment call. A country has a particular personality that determineshow it behaves in response to shocks. Hence, traders who bet on trendschanging tend to have larger-than-life personality and tend to showstrong convictions. The problem is that it is very hard to tell thedifference between conviction trading and gambling.

Thebig success stories are few. The star traders don't always win. Theiraverage performance may not be that good, especially for theirinvestors. As a trader's fame spreads, he attracts more and more money.One day, he stumbles and loses it all. As most of his investors comelate and didn't enjoy his earlier successes, they just lose. You oftenhear that a trader has averaged 15% or 20% annual return. This numberis based on the arithmetic average of the past years. If theperformance is weighed by the size of the fund under management, eventhe most famous traders have not made money for their investors. Ofcourse, these traders earned their fees during years of goodperformance and, when they lost the money of the investmentseventually, would still be rich.

Enron'strading model would run into diminishing returns like any otherbusiness. As it supplied more hedging or insurance products in theenergy market, the margins would shrink. Enron sold its business modelas a new discovery, not copying the Wall Street. The Fortune Magazinenamed Enron America's Most Innovative Company for six years in a row,from 1996-2001, right until before its collapse. The market expectedits earnings to grow at fast speed forever and its share price wastrading at 55 times 'earnings' with market capitalization of $65billion and ranked seventh on the Fortune 500 list. As its businessmodel couldn't meet market expectations, it shifted the other way andtried to bet on market direction, i.e., long volatility, for profit.This is essentially trying to make money in a casino and would be alosing proposition on average. To cover up the losses and report risingearnings, it 'sold' the unprofitable trades to self-controlledoff-balance sheet vehicles at a profit. The actual losses in theoff-balance sheet vehicles were not recognized by not marking-to-marketsuch assets. Such self-dealings pumped up its fake profits for years.When its hidden losses were discovered, the company collapsed. Enronwas a scam for a long time. I still remember many on Wall Streetthought its collapse was some sort of bank run, i.e., it was worth themoney but succumbed to a liquidity squeeze. Indeed, many Enron traderswere hired by Wall Street firms to strengthen their commodity tradingdivision.

The current credit crisis smellsvery much like the Enron crisis. The big financial institutions arewriting off the value of the assets on their books or the off-balancesheet vehicles brought back onto balance sheet. Investment banks aresupposed to be transaction oriented. A trader is rewarded when he sellswhat he bought at a profit. The assets on the book are inventories fora short period. However, the Wall Street began to reward traders on netpresent value of asset holdings rather than cash profit. Of course, itencouraged traders to buy illiquid assets that they can control pricestemporarily. They can name their prices for the assets and get bigbonuses. When the inventories become too big to appear innocuous, theyare parked in off-balance sheet vehicles. However, when the debts forsuch vehicles came due, the banks that manufactured them had to bringthem back and assume the liability. These banks knew it then. Suchvehicles were manufactured with the sole purpose to deceive the market.The current credit crisis unfolding on the Wall Street is not a resultof an unforeseen shock or an honest mistake. It is a scam from thebeginning. Most observers would disagree with me now. Time will tell.Jeffery Skilling, president of Enron, was sentenced to 24 years in jailon October 23, 2006. Ken Lay, the chairman and CEO, died right beforehis sentence. Justice may come slowly and will come.

Thedriving force behind the current crisis is exactly the same as thatbehind Enron. After the IT burst in 2000, the earnings for the WallStreet firms collapsed. The Wall Street types work for big bonuses,which only occur when earnings rise. The Fed then cut interest rate to1% and kept it there. Every firm tried to take advantage of that byborrowing at 1% to buy something yielding more. The difference would bethe profits. As everyone rushed to do the same, the assets in demandinflated in value. For example, the corporate risk premium-the interestrate difference between corporate and government bonds collapsed. Asthe spread for such arbitrage shrank, to achieve the same profit, itneeded more leverage, i.e., less capital and more debt for purchasingsuch assets. Derivative products bloomed essentially to hide debts. Ascapital for holding assets became thinner and thinner, a small drop inasset price would wipe out the value of asset holding vehicles.

TheWall Street firms have announced $160 billion of losses so far, mainlyfrom derivatives associated with sub-prime products. However, there aremassive amount of other assets on their balance sheets. Mortgage backedsecurities (MBS) and leveraged loans are the latest candidates. Thelosses from these two could equal or surpass the announced losses. Thebiggest problem is that nobody knows where the next explosion wouldcome from. The notional value of derivatives totaled $350 trillion lastyear. So many structured products depended on each other. Nobody couldunderstand how one affects the other. Many traders who manufacturedsuch products have already been fired. Even they themselves probablydidn't understand their products. How could others do? Hence, thefuture of the global financial system is totally uncertain. What weknow is that the aggregate losses would be correlated with assetdepreciation. Some analysts speculate that the total losses wouldexceed half a trillion dollars. Frankly, we don't know. What we canexpect is that more bombs would go off in 2008. The worst are not over.

Oneof the largest global banks will probably go burst this year. There isa significant chance that two could go under. The world would see thetrue picture then. It was a bunch of crooks who committed frauds to paythemselves. Chinese press often associates the stature of the WallStreet types with their compensation. Unfortunately, the highest paidin the past four years may go to jail. We still hear many fired seniorpeople being fired and still walking away with tens of millions ofdollars after destroying their companies. I haven't seen outrage in themarket or press about such horrible outcomes. Such people paidthemselves big amounts of money on fake profits. When the scam wasexposed, they could still walk sway with tens of millions more. Thiscrisis is not over until people regain common senses. A great theft hasbeen perpetrated on investors and shareholders of financialinstitutions. The crisis can end when the perpetrators are brought tojustice.

谢国忠搜狐博客 http://xieguozhong.blog.sohu.com/


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