So I noticed a rather sudden and significant drop in my readership this week. At first I thought it was just noise, but it persisted for a few days. I then realized my facebook account had been disabled, and I assume a fair number of you found this site through facebook. It seemed to be the perfect place to advertise since it's mostly college students (and college students then look for jobs). Anyway, it would be nice if I could gain back some of that readership, so if you guys could help spread the word of this blog, that'd be helpful. Readership numbers keep me engaged (and much like other things in life, I like seeing the little numbers tick up).
Cheers,
QT
Friday, June 29, 2007
Thursday, June 28, 2007
A bear of a Bear?
Figured I ought to write something about the Bear Stearns mess that just unfolded in the past week. I'm not sure whether I should be making my posts more timely as things are occurring or only after the fact. I had figured that I ought to write everything after the fact in order to avoid putting anything out there that might still be sensitive or incorrect information. Let me know if you have an opinion either way.
Well, it seems the players have made their entries and exits. A Bear Stearns' hedge fund backed largely by subprime mortgage backed securities got into some trouble last week and nearly faced liquidation. At one point people were talking about Merril the funds' assets to cover their margins. There was talk of help from Goldman, Bank of America, Credit Suisse, JP Morgan, etc. None of it came together. Then, finally, Bear decided to save its own hedge fund. That's cool. Then there was talk of Bear's other hedge fund and whether it would save that one too. They decided not to.
So what's it all mean? It had all sorts of implications on the credit/structured markets. ABX (the asset-backed securities index) was tanking from the subprime woes. A lot of that money went into treasuries, making a flight to quality type rally for a while in rates markets. Overall though, it didn't make that big a splash in the markets as far as I'm concerned. People are making a big deal out of something that really didn't change much.
There's talk now about whether Bear Stearns is in trouble too. Well, that's just bunk. Bear might show a PnL hit, but I doubt this would put them in jeopardy. Others talk about this making Bear Stearns prone to a buy-out / acquisition. I think that , while more likely than Bear Stearns going bust, is still crap.
Where I have heard the subprime mess and the Bear Stearns mess having effects is in origination. Apparently the appetite for these sorts of loans has significantly declined both on the originators side and on the buyers side. That means people are more stringent about their loan characteristics before they are willing to loan the money and buyers are less likely to buy the securitizations. Double whammy for the capital seekers there.
Well, it seems the players have made their entries and exits. A Bear Stearns' hedge fund backed largely by subprime mortgage backed securities got into some trouble last week and nearly faced liquidation. At one point people were talking about Merril the funds' assets to cover their margins. There was talk of help from Goldman, Bank of America, Credit Suisse, JP Morgan, etc. None of it came together. Then, finally, Bear decided to save its own hedge fund. That's cool. Then there was talk of Bear's other hedge fund and whether it would save that one too. They decided not to.
So what's it all mean? It had all sorts of implications on the credit/structured markets. ABX (the asset-backed securities index) was tanking from the subprime woes. A lot of that money went into treasuries, making a flight to quality type rally for a while in rates markets. Overall though, it didn't make that big a splash in the markets as far as I'm concerned. People are making a big deal out of something that really didn't change much.
There's talk now about whether Bear Stearns is in trouble too. Well, that's just bunk. Bear might show a PnL hit, but I doubt this would put them in jeopardy. Others talk about this making Bear Stearns prone to a buy-out / acquisition. I think that , while more likely than Bear Stearns going bust, is still crap.
Where I have heard the subprime mess and the Bear Stearns mess having effects is in origination. Apparently the appetite for these sorts of loans has significantly declined both on the originators side and on the buyers side. That means people are more stringent about their loan characteristics before they are willing to loan the money and buyers are less likely to buy the securitizations. Double whammy for the capital seekers there.
Wednesday, June 27, 2007
Learn the Lingo (Mortgages)
So with the whole subprime market going bust and the Bear Stearns fund nearly going belly-up, I figured there might be some people who would like a mortgage markets primer. In case you're wondering, I did a good bit of prepayment modeling for a mortgage book. Here we go!
MBS - mortgage backed security. This is the fundamental building block. Basically a pool of mortgages are put together into one entity and then the entity pays off a coupon every month based on those mortgage payments. If you own an MBS you have effectively lent to this entity which has lent the money out to all the people who took out mortgages. If the people pay their mortgage off early then you get your money back early (this can be good or bad, depending). If they default on their mortgages you may have to take that loss as well.
Securitization - the act of creating a security from a set of assets. In the case we are talking about today, it is the act of pooling mortgages, enhancing the credit and selling it off.
FNMA - Fannie Mae, often refers to MBS backed by Fannie Mae. Fannie Mae guarantees the mortgages it packages. All FNMA securities have a set coupon and high credit ratings. These are all securitized with credit enhancement so they are AAA rated by credit agencies. Basically FNMA securities are considered default free and backed by the government (note that I said "basically." They aren't technically backed by the government).
GNMA - Ginnie Mae, much like Gannie Mae backs MBS. If you want the details between FNMA, GNMA and other quasi-government agencies that back MBS, I suggest you google around a bit (or e-mail me).
Credit Rating - Credit agencies (Standard and Poors, Fitch, etc) give credit ratings according to the likelihood of an entity's default. AAA is good, AA is a little worse, and it goes all the way down to B, C and technical default.
FICO - Fair Isaac's COrporation score refers to a commonly used method of rating a customer/individual's credit (likelihood to default).
Pool - a pool is a set of mortgages that go into a given security. Pools are often characterized by average size of loan, average FICO of borrower, average mortgage rate, etc.
Coupon - the % of notional that a given security pays off. A 5% FNMA security pays an annual 5% in monthly buckets.
Sub-Prime - Subprime mortgages refer to mortgages made to customers of "sub-prime" FICO score. Prime FICO scores generally are considerd those over 660. It is important to know that FNMA and other major agencies do not securitize sub-prime mortgages (remember, they make all their stuff AAA rated), so a lot of these are securitized directly by banks.
CMBS - Commercial Mortgage Backed Security. These are much like MBS, but they are backed by commercial mortgage loans (think: the loan taken out to fund the local mall or the grocery store).
Prepayment - refers to a mortgage holder's right to pay off the mortgage early to pay off part of the balance of the mortgage and thus reduce the life of the loan. This is often called the "prepayment option" embedded in the mortgage, which is the equivalent of an embedded put option.
ARM - Adjustable Rate Mortgage refers to mortgages that have an interest rate reset over time. These are often seen as "X-N ARMs," which means the rate is fixed for the first X years and then resets on an N year interval. Commonly you'll see things like 5-1 ARMs and 7-1 ARMs.
FRM - Fixed Rate Mortgage. These are mortgages where the rate is fixed from the beginning and never changes.
IO - Interest Only. These mortgages are like ARMs, but you only pay interest payments for the first X years. Kinda scary if you think about it. IOs can also refer to IO securities, which are the interest only portion of a loan. In mortgage space this means you can get the interest portion of a mortgage pool's payments. That means in the event of prepayment, you get basically nothing because they mortgage owner decided to pay off the entire balance before interest kicked in.
PO - Principal Only. You can't take out a principal only mortgage. I don't even know how you could make something of the sort. POs refer to the principal only securities. Clearly if you're securitizing IOs, you're going to have a PO portion left. The POs are the opposite of IOs in that if there is a prepayment, suddenly all the money you were expecting comes to you a lot early than expected (bonus!) and you can earn returns off of it some other way.
CMO - Collateralized Mortgage Obligation. These are a type of MBS (specifically called a "pass-through" MBS). These are special because they have a payment hierarchy, so you can get protection from prepayment (and default) through the structure. Thus AAA CMOs are protected more than A CMOs. These slices of hierarchy are called tranches.
CDO - Collateralized Debt Obligation. These usually refer to something that looks the same as CMOs except in non-mortgage space. They also can refer to a collection of CMO tranches collected into one item. So, for example, if I create an entity backed by a bunch of different CMO BBB tranches, I have effectively created a derivative off of the mortgage derivative (risk management for these are a bitch because they involve all sorts of weird correlations). Sometimes the CDOs of CDOs or CDOs of CMOs are called CDO-squares.
CPR - Conditional Prepayment Rate. This is how expected prepayment is measured in mortgage space. For example, a 10% CPR means 10% of the remaining balance is expected to be paid off in that period.
PSA - Public Securities Association prepayment model. This model is also used to measure prepayment rate (although not as commons as CPR). It assumes some constant prepayment rate and gives the forecasted rate according to that reference rate. See: http://en.wikipedia.org/wiki/PSA_prepayment_model for the details.
SMM - Single Monthly Mortality rate. This is directly related to CPR by the equation: SMM = 1-(1-CPR)^(1/12).
MSR - Mortgage Servicing Right. These are a residual security to compensate companies that service mortgages. When a mortgage is created, someone actually has to do the collection of the payments, process the payments and divvy it up among the holders of the MBS. The MSR is this form of payment, it gets .25 bps off of every payment. As you can imagine, these value much like IO securities --if prepayment occurs it's worth a lot less than if it drags on for a long time.
Mortgage Servicer - People will often talk about big players in the markets. Mortgage servicers are one of the big players. They are one of the whale accounts that often smash the market with billion dollar trades. The reason they do such ridiculous size is because they tend to be out there hedging their loads of MSRs. As it turns out mortgage servicing is an economies of scale business, so people who hold MSRs tend to have a lot of them. Hedging them is a rather complicated endeavor, but it's often done with a combination of swaps, swaptions, treasuries and MBS.
Mortgage Hedger - Another type of big player in the market. Mortgage hedgers are a superset of mortgage servicers. A lot of big mortgage originators hold a lot of those mortgages on their balance sheet instead of structuring them and selling them off. These people also need to hedge their balance sheet exposure via the capital markets and tend to do so in big size.
I'm sure I'm missing a whole bunch of stuff, but that's what rolls off my head at the moment. As always, feel free to e-mail me with questions.
MBS - mortgage backed security. This is the fundamental building block. Basically a pool of mortgages are put together into one entity and then the entity pays off a coupon every month based on those mortgage payments. If you own an MBS you have effectively lent to this entity which has lent the money out to all the people who took out mortgages. If the people pay their mortgage off early then you get your money back early (this can be good or bad, depending). If they default on their mortgages you may have to take that loss as well.
Securitization - the act of creating a security from a set of assets. In the case we are talking about today, it is the act of pooling mortgages, enhancing the credit and selling it off.
FNMA - Fannie Mae, often refers to MBS backed by Fannie Mae. Fannie Mae guarantees the mortgages it packages. All FNMA securities have a set coupon and high credit ratings. These are all securitized with credit enhancement so they are AAA rated by credit agencies. Basically FNMA securities are considered default free and backed by the government (note that I said "basically." They aren't technically backed by the government).
GNMA - Ginnie Mae, much like Gannie Mae backs MBS. If you want the details between FNMA, GNMA and other quasi-government agencies that back MBS, I suggest you google around a bit (or e-mail me).
Credit Rating - Credit agencies (Standard and Poors, Fitch, etc) give credit ratings according to the likelihood of an entity's default. AAA is good, AA is a little worse, and it goes all the way down to B, C and technical default.
FICO - Fair Isaac's COrporation score refers to a commonly used method of rating a customer/individual's credit (likelihood to default).
Pool - a pool is a set of mortgages that go into a given security. Pools are often characterized by average size of loan, average FICO of borrower, average mortgage rate, etc.
Coupon - the % of notional that a given security pays off. A 5% FNMA security pays an annual 5% in monthly buckets.
Sub-Prime - Subprime mortgages refer to mortgages made to customers of "sub-prime" FICO score. Prime FICO scores generally are considerd those over 660. It is important to know that FNMA and other major agencies do not securitize sub-prime mortgages (remember, they make all their stuff AAA rated), so a lot of these are securitized directly by banks.
CMBS - Commercial Mortgage Backed Security. These are much like MBS, but they are backed by commercial mortgage loans (think: the loan taken out to fund the local mall or the grocery store).
Prepayment - refers to a mortgage holder's right to pay off the mortgage early to pay off part of the balance of the mortgage and thus reduce the life of the loan. This is often called the "prepayment option" embedded in the mortgage, which is the equivalent of an embedded put option.
ARM - Adjustable Rate Mortgage refers to mortgages that have an interest rate reset over time. These are often seen as "X-N ARMs," which means the rate is fixed for the first X years and then resets on an N year interval. Commonly you'll see things like 5-1 ARMs and 7-1 ARMs.
FRM - Fixed Rate Mortgage. These are mortgages where the rate is fixed from the beginning and never changes.
IO - Interest Only. These mortgages are like ARMs, but you only pay interest payments for the first X years. Kinda scary if you think about it. IOs can also refer to IO securities, which are the interest only portion of a loan. In mortgage space this means you can get the interest portion of a mortgage pool's payments. That means in the event of prepayment, you get basically nothing because they mortgage owner decided to pay off the entire balance before interest kicked in.
PO - Principal Only. You can't take out a principal only mortgage. I don't even know how you could make something of the sort. POs refer to the principal only securities. Clearly if you're securitizing IOs, you're going to have a PO portion left. The POs are the opposite of IOs in that if there is a prepayment, suddenly all the money you were expecting comes to you a lot early than expected (bonus!) and you can earn returns off of it some other way.
CMO - Collateralized Mortgage Obligation. These are a type of MBS (specifically called a "pass-through" MBS). These are special because they have a payment hierarchy, so you can get protection from prepayment (and default) through the structure. Thus AAA CMOs are protected more than A CMOs. These slices of hierarchy are called tranches.
CDO - Collateralized Debt Obligation. These usually refer to something that looks the same as CMOs except in non-mortgage space. They also can refer to a collection of CMO tranches collected into one item. So, for example, if I create an entity backed by a bunch of different CMO BBB tranches, I have effectively created a derivative off of the mortgage derivative (risk management for these are a bitch because they involve all sorts of weird correlations). Sometimes the CDOs of CDOs or CDOs of CMOs are called CDO-squares.
CPR - Conditional Prepayment Rate. This is how expected prepayment is measured in mortgage space. For example, a 10% CPR means 10% of the remaining balance is expected to be paid off in that period.
PSA - Public Securities Association prepayment model. This model is also used to measure prepayment rate (although not as commons as CPR). It assumes some constant prepayment rate and gives the forecasted rate according to that reference rate. See: http://en.wikipedia.org/wiki/PSA_prepayment_model for the details.
SMM - Single Monthly Mortality rate. This is directly related to CPR by the equation: SMM = 1-(1-CPR)^(1/12).
MSR - Mortgage Servicing Right. These are a residual security to compensate companies that service mortgages. When a mortgage is created, someone actually has to do the collection of the payments, process the payments and divvy it up among the holders of the MBS. The MSR is this form of payment, it gets .25 bps off of every payment. As you can imagine, these value much like IO securities --if prepayment occurs it's worth a lot less than if it drags on for a long time.
Mortgage Servicer - People will often talk about big players in the markets. Mortgage servicers are one of the big players. They are one of the whale accounts that often smash the market with billion dollar trades. The reason they do such ridiculous size is because they tend to be out there hedging their loads of MSRs. As it turns out mortgage servicing is an economies of scale business, so people who hold MSRs tend to have a lot of them. Hedging them is a rather complicated endeavor, but it's often done with a combination of swaps, swaptions, treasuries and MBS.
Mortgage Hedger - Another type of big player in the market. Mortgage hedgers are a superset of mortgage servicers. A lot of big mortgage originators hold a lot of those mortgages on their balance sheet instead of structuring them and selling them off. These people also need to hedge their balance sheet exposure via the capital markets and tend to do so in big size.
I'm sure I'm missing a whole bunch of stuff, but that's what rolls off my head at the moment. As always, feel free to e-mail me with questions.
Tuesday, June 26, 2007
Attrition
It's no secret that investment banks have ridiculously high attrition. Apparently this hits some new folks pretty hard, as I've seen a fair bit of fright and sadness in the new guys from time to time. It's simply something with which you learn to deal. I've had my fair share of friends and mentors move on to other places both on their own accord and not. It can be a sad occasion or a joyous occasion, but there's not doubt that the people you know at the bank constantly shift. The "go-to" guy one moment could quickly become non-existent. You learn to deal with this shifts both personally and professionally.
Personally, I don' t think I can help much. Everyone deals with their friends leaving their firm in a different way. I had one kid crying one day when a big downsizing was announced for a bunch of people he knew. Life goes on, people find jobs in or outside the industry. It happens all the time in this industry, so you'll shed a lot of tears (in fact at around the same time every year) if you don't get used to it. A boss of mine once lamented that all the traders he used to know were gone although the salespeople always seem to be around. It's even worse on the i-banking side, as I know precious few people who stuck around longer than a few years.
Professionally, I recommend you seek out multiple sources for all your help and information. Sure it's convenient to always go to the same guy, but what happens when that guy is gone? Suddenly you're a fish out of water. If you're going to a tech guy all the time, get to know his co-workers and consult with them from time to time too. If you always talk to one trader for market color, try talking to others on his desk from time to time. Same goes for brokers, salespeople, operations, etc. It's always good to have someone else you can go to (helps when your guy is on vacation too).
Turnover at hedge funds (other than Citadel) is apparently not as high as an investment bank, which surprised me. Then again, most hedge funds consist of some 20 guys in a room, so it's more like a tight knit family. Large institutions bent on making money will always churn their staff for cheaper alternatives. Experience is useful, but only for certain jobs (and if someone cheaper and better comes along, then so long).
You learn to deal with the turnover on the job, and you learn to defend yourself from turnover too. Most banks are pretty good about allowing all but the most senior and most junior people to look around for another position. The same can not be said for hedge funds. It's good to be in contact with a good headhunter at all times for good measure as well. These people will help you find a job, and if you're more senior they will help you hire for new positions as well (an often underestimated task to the inexperienced). It's also important to gain marketable skills. A good market maker can always find a job at a bank. A good salesperson will always have his contacts and thus find a job. A bad prop guy will never find another job (one of the dangers of going to a prop desk or a hedge fund too early is that you don't have that market making skill to fall back on if you fail as a position trader).
Keep your options in mind and proceed carefully, but if you work hard (and your friends work hard) you should be alright.
Personally, I don' t think I can help much. Everyone deals with their friends leaving their firm in a different way. I had one kid crying one day when a big downsizing was announced for a bunch of people he knew. Life goes on, people find jobs in or outside the industry. It happens all the time in this industry, so you'll shed a lot of tears (in fact at around the same time every year) if you don't get used to it. A boss of mine once lamented that all the traders he used to know were gone although the salespeople always seem to be around. It's even worse on the i-banking side, as I know precious few people who stuck around longer than a few years.
Professionally, I recommend you seek out multiple sources for all your help and information. Sure it's convenient to always go to the same guy, but what happens when that guy is gone? Suddenly you're a fish out of water. If you're going to a tech guy all the time, get to know his co-workers and consult with them from time to time too. If you always talk to one trader for market color, try talking to others on his desk from time to time. Same goes for brokers, salespeople, operations, etc. It's always good to have someone else you can go to (helps when your guy is on vacation too).
Turnover at hedge funds (other than Citadel) is apparently not as high as an investment bank, which surprised me. Then again, most hedge funds consist of some 20 guys in a room, so it's more like a tight knit family. Large institutions bent on making money will always churn their staff for cheaper alternatives. Experience is useful, but only for certain jobs (and if someone cheaper and better comes along, then so long).
You learn to deal with the turnover on the job, and you learn to defend yourself from turnover too. Most banks are pretty good about allowing all but the most senior and most junior people to look around for another position. The same can not be said for hedge funds. It's good to be in contact with a good headhunter at all times for good measure as well. These people will help you find a job, and if you're more senior they will help you hire for new positions as well (an often underestimated task to the inexperienced). It's also important to gain marketable skills. A good market maker can always find a job at a bank. A good salesperson will always have his contacts and thus find a job. A bad prop guy will never find another job (one of the dangers of going to a prop desk or a hedge fund too early is that you don't have that market making skill to fall back on if you fail as a position trader).
Keep your options in mind and proceed carefully, but if you work hard (and your friends work hard) you should be alright.
Monday, June 25, 2007
Risk vs Reward
I was reminded today that everything should be looked at in a risk-reward trade-off. As soon as you forget this basic rule, you start taking on unnecessary risk. In reality, your mind should subtley be judging every word you speak and every action you take in terms of the risks you take and the rewards offered. I had forgotten this simple fact and taken on some unnecessary risks that a friend kindly reminded me to avoid.
Risks come in all flavours. There is, of course, the simple financial risk taken by people every day in the markets, but there are many other forms. Operational risk effects the ability of an entity to perform it's daily routines. Reputation risk effects how people will view you in the future. Career risk effects how you might be viewed in the office. Personal risks effect your personal life (perhaps whether or not you score that hot date). Risks come in all forms, and throughout life you should be analyzing the risks involved in your life. I know when I take the time to think about it, I take on a lot more risk every day than I normally realize.
The NYC subways now have an ad campaign that states something along the lines of "find the upside of risk." You should never be afraid to take risk, for with no risk comes no reward, but take constant calculated risks and make sure you're never blindsided.
Risks come in all flavours. There is, of course, the simple financial risk taken by people every day in the markets, but there are many other forms. Operational risk effects the ability of an entity to perform it's daily routines. Reputation risk effects how people will view you in the future. Career risk effects how you might be viewed in the office. Personal risks effect your personal life (perhaps whether or not you score that hot date). Risks come in all forms, and throughout life you should be analyzing the risks involved in your life. I know when I take the time to think about it, I take on a lot more risk every day than I normally realize.
The NYC subways now have an ad campaign that states something along the lines of "find the upside of risk." You should never be afraid to take risk, for with no risk comes no reward, but take constant calculated risks and make sure you're never blindsided.
Friday, June 22, 2007
Taking Heat
Let's face it, Wall Street is not for the faint of heart. Tensions often run high and there's a lot of yelling and cussing. This is especially true when something gets fucked up. To be honest, if you're the type to get easily offended, this is not the place for you. You've got to be able to separate your interactions with people each day as if you were starting anew.
Grace under fire becomes key when you screw something up. The first thing to be done is to admit to your mistake. "Sorry, I screwed that up. I'll take full responsibility." Putting it straight out there when you realized the mistake is your best bet. If you know you can fix your mistake you can fix the mistake before you tell people, but even after you fix it you should tell your boss. "I screwed that up, but I minimized losses by. . . "
If your boss continues to reprimand you for the mistake after taking responsibility, that is fairly normal. Just listen and take in everything being said. Hidden among the curses is usually a suggestion on how the situation should have been handled. Don't say too much to your defense unless you are absolutely sure you're right and your boss is willing to listen. If your boss isn't going to listen anyway then saying anything might be like pouring water on an electrical fire (for those of you who don't know, pouring water on an electrical fire will only make matters worse).
Chances are you'll be a bit upset. Screwing up, losing money and getting yelled at are not easy things to deal with. Even the most stoic can get a little bit phased by the combination of the three. Trust me, I thought I was pretty emotionless in the face of adversity, but my first big loss definitley left me a bit shaken. Deciding to take a brief walk around the block is an excellent choice. Taking time to cool off before re-engaging is always admirable.
It's good not to screw up, but even the best of us do sometimes. Deal with it gracefully and your superiors will notice.
Grace under fire becomes key when you screw something up. The first thing to be done is to admit to your mistake. "Sorry, I screwed that up. I'll take full responsibility." Putting it straight out there when you realized the mistake is your best bet. If you know you can fix your mistake you can fix the mistake before you tell people, but even after you fix it you should tell your boss. "I screwed that up, but I minimized losses by. . . "
If your boss continues to reprimand you for the mistake after taking responsibility, that is fairly normal. Just listen and take in everything being said. Hidden among the curses is usually a suggestion on how the situation should have been handled. Don't say too much to your defense unless you are absolutely sure you're right and your boss is willing to listen. If your boss isn't going to listen anyway then saying anything might be like pouring water on an electrical fire (for those of you who don't know, pouring water on an electrical fire will only make matters worse).
Chances are you'll be a bit upset. Screwing up, losing money and getting yelled at are not easy things to deal with. Even the most stoic can get a little bit phased by the combination of the three. Trust me, I thought I was pretty emotionless in the face of adversity, but my first big loss definitley left me a bit shaken. Deciding to take a brief walk around the block is an excellent choice. Taking time to cool off before re-engaging is always admirable.
It's good not to screw up, but even the best of us do sometimes. Deal with it gracefully and your superiors will notice.
Thursday, June 21, 2007
Separating from the Pack
Intern season is in full bloom, and I've been working with my share of interns this summer. Here are some thoughts thus far on what has separated the wheat from the chaffe.
1) We have this one kid who isn't even working for our desk (yet) asking for work. He knows he's rotating to our desk in the second half of the summer, so he's getting a head start on what we trade and what projects we might have him work on. By doing this he has shown an excellent work ethic, ability to gather information (who knows how he found out where his next rotation is) and some interesting time management. He says his current group is often too busy to give him work, so he can start looking at stuff we do. He has, at once, demonstrated that he goes looking for work and that he has the ability to see when not to bother people too much. Good stuff, kid. I would advise, however, to be careful with pulling moves like this too much because if the group he's currently working for hears too much of this, that could be bad news.
2) Another kid, not on my desk, has been known to take a walk on the job. He has, unfortunately, been placed in a seat that is across the room from his group (bad seating arrangement, but you have to make do when seats are in precious demand). Taking advantage of his situation, he has decided to spend a lot of time away from the desk, running errands, eating lunch, going for strolls, meeting with friends, etc. He thinks nobody knows because his group sits so far from him. Dumb kid shouldn't be surprised when he doesn't get an offer. People talk.
3) There's a girl who asks a lot of questions. That's generally very commendable. Less commendable when she hovers a lot during busy times. I think I've mentioned this in a different post, but I heard a couple market makers getting pretty annoyed by her.
4) One guy actually tried to correct a market maker in his price. That's pretty stupid. Needless to say, he was wrong. In fact, this guy is generally overly cocky and pisses people off by trying to tell them what they should do. Not a good idea. Even though cockyness is pretty common on the floor, correcting people who've been doing this stuff for years is a bad idea. Also a great way not to get a job.
That's all for now. Lots of negatives, only one good. Well, as I keep quoting, "the internship is yours to screw up."
1) We have this one kid who isn't even working for our desk (yet) asking for work. He knows he's rotating to our desk in the second half of the summer, so he's getting a head start on what we trade and what projects we might have him work on. By doing this he has shown an excellent work ethic, ability to gather information (who knows how he found out where his next rotation is) and some interesting time management. He says his current group is often too busy to give him work, so he can start looking at stuff we do. He has, at once, demonstrated that he goes looking for work and that he has the ability to see when not to bother people too much. Good stuff, kid. I would advise, however, to be careful with pulling moves like this too much because if the group he's currently working for hears too much of this, that could be bad news.
2) Another kid, not on my desk, has been known to take a walk on the job. He has, unfortunately, been placed in a seat that is across the room from his group (bad seating arrangement, but you have to make do when seats are in precious demand). Taking advantage of his situation, he has decided to spend a lot of time away from the desk, running errands, eating lunch, going for strolls, meeting with friends, etc. He thinks nobody knows because his group sits so far from him. Dumb kid shouldn't be surprised when he doesn't get an offer. People talk.
3) There's a girl who asks a lot of questions. That's generally very commendable. Less commendable when she hovers a lot during busy times. I think I've mentioned this in a different post, but I heard a couple market makers getting pretty annoyed by her.
4) One guy actually tried to correct a market maker in his price. That's pretty stupid. Needless to say, he was wrong. In fact, this guy is generally overly cocky and pisses people off by trying to tell them what they should do. Not a good idea. Even though cockyness is pretty common on the floor, correcting people who've been doing this stuff for years is a bad idea. Also a great way not to get a job.
That's all for now. Lots of negatives, only one good. Well, as I keep quoting, "the internship is yours to screw up."
This made me smile
A rather observant private equity guy just started a blog. I know I'll be reading it.
http://strikershank.blogspot.com/
Wednesday, June 20, 2007
The Economics of Dating
So I was at the bar with a couple of friends this weekend and had a rather amusing discussion. And by interesting I mean filled with machismo and vulgarity (you have been warned). Also, if you are a lady reading this, I think it's worth reading all the way through it to see the big picture (this actually advocates that men should be spending a lot of money on women). Look, this is meant to be for entertainment. It's also known to be VERY politically incorrect, but try to view this as a way of trying to measure things from an economic angle. It's hard to put a price on some things, so I use the only proxies for prices possible. No it's not tasteful, it's Wall Street.
The discussion at hand was how much a man spends on a girlfriend (or a prospective girlfriend or a prospective one-night stand) over time. What's a fair way to gauge how much a guy "should" spend on a girl? Well, here's how I think an economist would look at it:
What are the positive things you get out of it? Well, men obviously value sex. There's something about emotional support (although no girlfriend of mine has ever really been much emotional support. . . kidding. . .sorta. . .). Finally, there is the companionship (who really wants to go see a movie alone?). Let's value each of these.
First off, the sex. Market price for sex can be found on craigslist. I assume a "full service" massage is sex. If I'm wrong, please let me know (but don't let me know why you know) . I'm seeing it at about $200/hour. That sounds reasonable. Let's say sex goes at about $200/hr.
Second, the emotional support. Psychiatrists can give you all the emotional support you need for $130/hour (I actually called a therapist to ask for his fee just now, that was awkward).
Last, the companionship I'm actually going to mark-to-market as free. While it does have a dollar value, you can usually find some sort of companion for your movies, dinners, etc unless you're really a loser.
So if you have a full fledged girlfriend with whom you have sex for, say, four hours a week and divulge your emotional distress for two hours a week, you should be willing to pay $1060 per week. Wow, that's a lot. If we price it for a one night stand, we can just price the sex at $200/hr. Let's say it's a short one night stand, and a man should be willing to drop at least $200 fair value on drinks or whatever date expenditures.
The girl we were with protested that the sex was being priced at prostitution levels. Well, that's just dumb. I'm sitting here advocating that men ought to be willing to spend some $1060/week on a girl (that's a LOT higher than average wages in the US), and this girl is telling me that she finds that offensive. I bet you anything she doesn't complain when her boyfriend buys her gifts, dinner and drinks. In any case, the prostitution charges being offensive thing is a weak argument (she later went and slept with my friend that night).
The best argument, in my opinion, is that women get a lot out of it too. Well, an attractive woman has no trouble getting sex (hell, an unattractive woman has no trouble getting sex. . .). That' s for certain. So even if there is a market for male prostitution, it's a redundant market. Let's look at the therapy part. First off, there are a lot of men who are willing to be personal therapists for free (or for the enjoyment of being seen with an attractive woman, or for the glimmer of hope that the woman may some day actually become his girlfriend). So I'd argue that the mark-to-market of therapy for a woman is relatively low as well.
For argument's sake, let's let the woman's therapy be the same price--$130/hr. Now I'm going to argue for gender equality, I'm all for that. Well, even if we go for gender equality, let's face it, women require more emotional support than men. If you disagrees, please feel free to comment (rationally). So let's try to make for gender equality. That means the amount per week spent by men at fair value ($1060) should be equal to the fair value of what the men bring to the "relationship." So if that's to be monetized as therapy, we can price it at 8.15 hours. So a relationship with four hours of sex and two hours of the man whining per week should also have eight hours of the woman whining per week. Does that sound reasonable?
Now I've been pricing off of an attractive women. Of course an attractive woman is going to be able to more readily get free sex and therapy from men, so they can either whine more or demand more money be spent on them. In addition attractive women would be able to charge more if they were to prostitute themselves (hypothetical, please), again this means she can whine more or demand more money. So it is not surprising if attractive women cost more to date or just happen to be higher maintenance emotionally.
If we assume an unattractive woman, then the price moves the other way. She can not demand as much in dating costs and she can not be as high maintenance emotionally.
Now I haven't taken into account what happens when you have an ugly guy. I'm not sure if prostitutes or therapists can charge more for services with an ugly guy, but maybe they can. The prostitutes aren't technically working legally anyway, so I guess they wouldn't be effected by discrimination laws, at the very least.
Clearly, this is not how actual relationships work. Not only am I missing a lot of the value that comes out of a relationship, but I am simplifying everything for argument's sake. Men and women do not court on a monetary fair-value basis, but it's interesting. If you ever observe that really attractive women tend to be higher maintenance, well, there may well be a good economic reason for it.
I hope you enjoyed this economic analysis of dating. Remember, it was a line of thought that was fleshed out from two very drunk traders and one female banker (who gave very little input). It does not reflect in any way how I think of dating in general, but I enjoy thinking through these sorts of things from a "purely rational" perspective.
The discussion at hand was how much a man spends on a girlfriend (or a prospective girlfriend or a prospective one-night stand) over time. What's a fair way to gauge how much a guy "should" spend on a girl? Well, here's how I think an economist would look at it:
What are the positive things you get out of it? Well, men obviously value sex. There's something about emotional support (although no girlfriend of mine has ever really been much emotional support. . . kidding. . .sorta. . .). Finally, there is the companionship (who really wants to go see a movie alone?). Let's value each of these.
First off, the sex. Market price for sex can be found on craigslist. I assume a "full service" massage is sex. If I'm wrong, please let me know (but don't let me know why you know) . I'm seeing it at about $200/hour. That sounds reasonable. Let's say sex goes at about $200/hr.
Second, the emotional support. Psychiatrists can give you all the emotional support you need for $130/hour (I actually called a therapist to ask for his fee just now, that was awkward).
Last, the companionship I'm actually going to mark-to-market as free. While it does have a dollar value, you can usually find some sort of companion for your movies, dinners, etc unless you're really a loser.
So if you have a full fledged girlfriend with whom you have sex for, say, four hours a week and divulge your emotional distress for two hours a week, you should be willing to pay $1060 per week. Wow, that's a lot. If we price it for a one night stand, we can just price the sex at $200/hr. Let's say it's a short one night stand, and a man should be willing to drop at least $200 fair value on drinks or whatever date expenditures.
The girl we were with protested that the sex was being priced at prostitution levels. Well, that's just dumb. I'm sitting here advocating that men ought to be willing to spend some $1060/week on a girl (that's a LOT higher than average wages in the US), and this girl is telling me that she finds that offensive. I bet you anything she doesn't complain when her boyfriend buys her gifts, dinner and drinks. In any case, the prostitution charges being offensive thing is a weak argument (she later went and slept with my friend that night).
The best argument, in my opinion, is that women get a lot out of it too. Well, an attractive woman has no trouble getting sex (hell, an unattractive woman has no trouble getting sex. . .). That' s for certain. So even if there is a market for male prostitution, it's a redundant market. Let's look at the therapy part. First off, there are a lot of men who are willing to be personal therapists for free (or for the enjoyment of being seen with an attractive woman, or for the glimmer of hope that the woman may some day actually become his girlfriend). So I'd argue that the mark-to-market of therapy for a woman is relatively low as well.
For argument's sake, let's let the woman's therapy be the same price--$130/hr. Now I'm going to argue for gender equality, I'm all for that. Well, even if we go for gender equality, let's face it, women require more emotional support than men. If you disagrees, please feel free to comment (rationally). So let's try to make for gender equality. That means the amount per week spent by men at fair value ($1060) should be equal to the fair value of what the men bring to the "relationship." So if that's to be monetized as therapy, we can price it at 8.15 hours. So a relationship with four hours of sex and two hours of the man whining per week should also have eight hours of the woman whining per week. Does that sound reasonable?
Now I've been pricing off of an attractive women. Of course an attractive woman is going to be able to more readily get free sex and therapy from men, so they can either whine more or demand more money be spent on them. In addition attractive women would be able to charge more if they were to prostitute themselves (hypothetical, please), again this means she can whine more or demand more money. So it is not surprising if attractive women cost more to date or just happen to be higher maintenance emotionally.
If we assume an unattractive woman, then the price moves the other way. She can not demand as much in dating costs and she can not be as high maintenance emotionally.
Now I haven't taken into account what happens when you have an ugly guy. I'm not sure if prostitutes or therapists can charge more for services with an ugly guy, but maybe they can. The prostitutes aren't technically working legally anyway, so I guess they wouldn't be effected by discrimination laws, at the very least.
Clearly, this is not how actual relationships work. Not only am I missing a lot of the value that comes out of a relationship, but I am simplifying everything for argument's sake. Men and women do not court on a monetary fair-value basis, but it's interesting. If you ever observe that really attractive women tend to be higher maintenance, well, there may well be a good economic reason for it.
I hope you enjoyed this economic analysis of dating. Remember, it was a line of thought that was fleshed out from two very drunk traders and one female banker (who gave very little input). It does not reflect in any way how I think of dating in general, but I enjoy thinking through these sorts of things from a "purely rational" perspective.
Tuesday, June 19, 2007
The Big Picture
Everyone makes a big deal about investment banking vs sales & trading, but many people seem to miss the many other opportunities in a bank. There are a LOT of interesting opportunities in every bank not restricted to those two "headline" areas. Places like Private Wealth Management (as a note, my first internship was in Private Wealth Management. . . admittedly it wasn't quite my style) are a huge cash-cow to investment banks, but they tend not to receive the same limelight the other two areas do. There is also risk management, which people sometimes shun but can actually be quite interesting. Commercial banks have what are known as "portfolios," which manage HUGE sums of money and move markets regularly. Insurance is a pretty interesting area related to banking these days too.
To relate this to a story, one of my good friends (and poker rival) actually started out in risk management. He was in risk management for almost 10 years before he switched over to be a swaps trader. The swaps guys are some of the most well respected (not to mention well paid) guys on the floor, and he came right into a senior trader position. I'd say he did perfectly well for himself. There are lots of folks who go into the analyst of associate trader programs, be a TA for a few years and never make it to being a trader. Fact of the matter is a bunch of things have to line up: you have to have the right temperament and knowledge, the desk has to have an open position, and there has to be no guy better suited for the position already in line. Life's a long game, look for the long term best expected value.
As my boss often says "get your head out of your ass." I see a lot of kids running around being adamant about wanting to be i-bankers or traders (even one kid I consider to be a complete MORON who is adamant about being a prop trader). Trust me, get your head out of your ass and look around. There are lots of other interesting functions in and around finance. There's nothing wrong with exploring opportunities. You never know what will get your foot in the door.
To relate this to a story, one of my good friends (and poker rival) actually started out in risk management. He was in risk management for almost 10 years before he switched over to be a swaps trader. The swaps guys are some of the most well respected (not to mention well paid) guys on the floor, and he came right into a senior trader position. I'd say he did perfectly well for himself. There are lots of folks who go into the analyst of associate trader programs, be a TA for a few years and never make it to being a trader. Fact of the matter is a bunch of things have to line up: you have to have the right temperament and knowledge, the desk has to have an open position, and there has to be no guy better suited for the position already in line. Life's a long game, look for the long term best expected value.
As my boss often says "get your head out of your ass." I see a lot of kids running around being adamant about wanting to be i-bankers or traders (even one kid I consider to be a complete MORON who is adamant about being a prop trader). Trust me, get your head out of your ass and look around. There are lots of other interesting functions in and around finance. There's nothing wrong with exploring opportunities. You never know what will get your foot in the door.
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