Alright so a bunch of people have noticed that I've slowed down my posting significantly and have become quite erratic in my timing. Unfortunately I've gotten ridiculously busy over the past month or so. This blog ended up taking a back-seat. I plan to start posting on a regular basis again (it's one my new-year's resolutions. . .no not really, but it would be if I did new year's resolutions). Expect a post at least once a week.
I've also included some helpful links for those of you who don't feel like clicking back here every time (if I'm bookmarked, I thank you). You can now subscribe to this blog in a reader, via e-mail and on technorati. All these services are available on the right side of this page.
Thanks for your patience and readership.
Sunday, December 30, 2007
Turn of Year
A lot has been said about the turn of year premium this year. I'm probably writing this post a bit later than I should have. This would have been a more timely post a month ago or even three months ago. Alas.
First off, what is the turn of year premium? Well, in fixed-income-land, the turn of year premium represents the extra interest one charges to lend money over new year's eve. Generally this year-end rate is significantly higher, say 8% when libor is 5%. Sounds kinda silly right? It's just an artifact of financial regulations and having to shore up captial at the end of year when regulatory numbers are checked. A similar event happens at the end of every month.
Why is this important? It represents financial institutions willingness to lend to each other at the year/month end. This is a proxy for the financial institution's confidence in it's capital ratios. If a financial institution is under-capitalized it can mean all sorts of bad things for them from a regulatory perspective (not to mention a investor-base's perspective).
In the 1999-2000 turn of year, this overnight rate had been predicted to be ridiculously high. 3 month libor (the rate at which banks were willing to lend to each other for three months) starting in september started sky-rocketing due to the rate that would be charged for that one night. The overnight rate had spiked to over 200% annualized. Why? Y2K. People were afraid everything was going to fall apart when computers broke down due to the Y2K issue, so they were un-willing to lend over that evening (if everything falls apart, they may never get their money back). Well, the Fed made sure to flood the monetary system with loads of free cash and the turn of year disaster was averted (in fact the turn of year was quite cheap that year). The entry into the year 2000 passed with no disaster.
This year we had a similar spike in libor year-end rates. Not a computer bug that frightens the world this year though, something much scarier (at least from my perspective). Everyone's heard of the credit crunch occuring from sub-prime mortgages by now. Sub prime mortgage defaults and resets on stupid mortgages made for the past decade are catching up to banks and other lenders. Capital is at a premium because all the banks are having to write down so many of their assets (loans are assets to banks, if people are defaulting they're not worth as much). In fact banks are scared shitless that the sub-prime issue is going to spread to all credit products, and for good reason. As balance sheet capital becomes more dear to banks, our year end premium starts flying. Of course in the past couple weeks the Fed has pumped the economy full of cash again and it looks like we'll have another smooth transition into the new year.
These year end and month end spikes are a big deal in the fixed income world, especially in fixed income derivatives. The ramifications of interest rates ripple into all other markets though, as discount rates for futures (in equity, commodities, forex, etc) all depend on how the fixed income market is setting rates.
First off, what is the turn of year premium? Well, in fixed-income-land, the turn of year premium represents the extra interest one charges to lend money over new year's eve. Generally this year-end rate is significantly higher, say 8% when libor is 5%. Sounds kinda silly right? It's just an artifact of financial regulations and having to shore up captial at the end of year when regulatory numbers are checked. A similar event happens at the end of every month.
Why is this important? It represents financial institutions willingness to lend to each other at the year/month end. This is a proxy for the financial institution's confidence in it's capital ratios. If a financial institution is under-capitalized it can mean all sorts of bad things for them from a regulatory perspective (not to mention a investor-base's perspective).
In the 1999-2000 turn of year, this overnight rate had been predicted to be ridiculously high. 3 month libor (the rate at which banks were willing to lend to each other for three months) starting in september started sky-rocketing due to the rate that would be charged for that one night. The overnight rate had spiked to over 200% annualized. Why? Y2K. People were afraid everything was going to fall apart when computers broke down due to the Y2K issue, so they were un-willing to lend over that evening (if everything falls apart, they may never get their money back). Well, the Fed made sure to flood the monetary system with loads of free cash and the turn of year disaster was averted (in fact the turn of year was quite cheap that year). The entry into the year 2000 passed with no disaster.
This year we had a similar spike in libor year-end rates. Not a computer bug that frightens the world this year though, something much scarier (at least from my perspective). Everyone's heard of the credit crunch occuring from sub-prime mortgages by now. Sub prime mortgage defaults and resets on stupid mortgages made for the past decade are catching up to banks and other lenders. Capital is at a premium because all the banks are having to write down so many of their assets (loans are assets to banks, if people are defaulting they're not worth as much). In fact banks are scared shitless that the sub-prime issue is going to spread to all credit products, and for good reason. As balance sheet capital becomes more dear to banks, our year end premium starts flying. Of course in the past couple weeks the Fed has pumped the economy full of cash again and it looks like we'll have another smooth transition into the new year.
These year end and month end spikes are a big deal in the fixed income world, especially in fixed income derivatives. The ramifications of interest rates ripple into all other markets though, as discount rates for futures (in equity, commodities, forex, etc) all depend on how the fixed income market is setting rates.
Wednesday, December 19, 2007
Fucking up
It's a matter of fact. You will fuck up at some point. It will probably cost your firm money. The scary thing in finance is that when you fuck something up, it costs the firm a very tangible amount of money. One of my favorite quotes is a manager I knew who once said:
"Just promise me you'll make a small mistake."
Most people who survive in this business make one very memorable mistake and become paranoid to the point of never really making a mistake again. Among my friends, the average first mistake size was somewhere close to $400k. That's not too bad. My first mistake was worth about $1.5m. Yea, that hurt. So what do you do when you make a mistake?
1) Fess up. Let your boss know you made a mistake and make it clear you're about to fix it.
2) Fix it. That doesn't necessarily mean make back the money you lost--that may be impossible--but make sure you've made your clients whole and you've made yourself good with your business partners.
3) Think it through. Figure out what went wrong and address the problem. Was it communication? Was it just the fact that you never double-checked your work? Was it systematic?
4) Don't let it get to you. Everyone's made a mistake. People may yell at you as if it's never happened to them, but it probably has. You need to keep doing your job and doing it well. If an error rattles you to the point that you become useless at your job, then you may well be fired.
4) Don't do it again. Enough said.
Keep a clear head and navigate your mistakes. It is those who weather the hard times that will eventually make it to the top.
"Just promise me you'll make a small mistake."
Most people who survive in this business make one very memorable mistake and become paranoid to the point of never really making a mistake again. Among my friends, the average first mistake size was somewhere close to $400k. That's not too bad. My first mistake was worth about $1.5m. Yea, that hurt. So what do you do when you make a mistake?
1) Fess up. Let your boss know you made a mistake and make it clear you're about to fix it.
2) Fix it. That doesn't necessarily mean make back the money you lost--that may be impossible--but make sure you've made your clients whole and you've made yourself good with your business partners.
3) Think it through. Figure out what went wrong and address the problem. Was it communication? Was it just the fact that you never double-checked your work? Was it systematic?
4) Don't let it get to you. Everyone's made a mistake. People may yell at you as if it's never happened to them, but it probably has. You need to keep doing your job and doing it well. If an error rattles you to the point that you become useless at your job, then you may well be fired.
4) Don't do it again. Enough said.
Keep a clear head and navigate your mistakes. It is those who weather the hard times that will eventually make it to the top.
Friday, December 7, 2007
Small World
The world of banking is tiny, although it will seem large at first. No matter what field you are in, there are really only maybe a hundred people around the world who specialize in the same area. Are you a healthcare i-banker? You'll probably see the same 20 people at pitches and conferences over the next few years, over and over and over again. Are you a consumer discretionary analyst? You'll be on calls and conferences with the same 30 people every month. You trade the long bond? You'll know all 20 bond dealers intimately over the phone and on the screens.
I'm usually the last one to care about politics and relations, but for those who are like me, don't piss these people off! You need to keep good relations with the street. Especially if you plan to make a career out of this. It's like rival teams in a sport. You play hard when you're against each other, but you hang out together afterwards. When it comes down to it, when you're looking for that next job, it's usually one of those competitors that will pull you into their firm.
Another thing to think about is how lucky you are to have that position and that there are hundreds of people lined up outside the gates ready to take that position from you. Don't give them a reason to take it! You have a coveted seat as one of about 20 people who do your job (hopefully well). Count your lucky stars and don't give any reason to be replaced. As soon as you get complacent and take your place for granted, that next guy will eat you alive.
I'm usually the last one to care about politics and relations, but for those who are like me, don't piss these people off! You need to keep good relations with the street. Especially if you plan to make a career out of this. It's like rival teams in a sport. You play hard when you're against each other, but you hang out together afterwards. When it comes down to it, when you're looking for that next job, it's usually one of those competitors that will pull you into their firm.
Another thing to think about is how lucky you are to have that position and that there are hundreds of people lined up outside the gates ready to take that position from you. Don't give them a reason to take it! You have a coveted seat as one of about 20 people who do your job (hopefully well). Count your lucky stars and don't give any reason to be replaced. As soon as you get complacent and take your place for granted, that next guy will eat you alive.
Saturday, December 1, 2007
Let Loose!
What's the difference between a bond and a bond trader? Old joke. The bond matures. It seems true. People in the finance industry don't mature in the same way people in other industries do. The old timers will still party hard with the newbies.
Ever wonder why that is? Well, I think it's because this industry will eat you alive if you don't learn to let loose your pent up energies once in a while. Stress in other industries is simply not the same as stress in this industry. One off moment, one slip of the tongue, one day-dream and you can find yourself several million dollars in the hole with way of reconciling (I've seen people quote the bid-side when asked for an offer in size and had a huge hole to work out of. . . it happens in less than two seconds). That's a lot of pressure to hold yourself to every day. Then, for those who survive, there's the added pressure of never letting the young folks catch up. Those who really excel also work when no one else is looking. Things stack up, and you've got to let loose once in a while to not let it get to you.
It's Saturday night. 10:30pm. I just finished some research and for next week. Keeping myself ahead of the curve so I can start Monday ready to take on the world. There's hardly a moment I don't feel the pressure of those coming up behind me to take my seat, so I need to keep myself ahead and more ready than any of my competitors to take the next big seat that opens. The pressure is always on. You know what though? For a few hours tonight, when I meet up with my friends at the bar/club, it'll all be out of my head.
We all have different ways of escaping, but "a good book" just won't cut it for an escape from our world. If you're in it for the long haul, you'll probably need to find a way to get it all out of your head once in a while. Don't be afraid to let loose. Then again, I probably didn't need to tell you that.
Ever wonder why that is? Well, I think it's because this industry will eat you alive if you don't learn to let loose your pent up energies once in a while. Stress in other industries is simply not the same as stress in this industry. One off moment, one slip of the tongue, one day-dream and you can find yourself several million dollars in the hole with way of reconciling (I've seen people quote the bid-side when asked for an offer in size and had a huge hole to work out of. . . it happens in less than two seconds). That's a lot of pressure to hold yourself to every day. Then, for those who survive, there's the added pressure of never letting the young folks catch up. Those who really excel also work when no one else is looking. Things stack up, and you've got to let loose once in a while to not let it get to you.
It's Saturday night. 10:30pm. I just finished some research and for next week. Keeping myself ahead of the curve so I can start Monday ready to take on the world. There's hardly a moment I don't feel the pressure of those coming up behind me to take my seat, so I need to keep myself ahead and more ready than any of my competitors to take the next big seat that opens. The pressure is always on. You know what though? For a few hours tonight, when I meet up with my friends at the bar/club, it'll all be out of my head.
We all have different ways of escaping, but "a good book" just won't cut it for an escape from our world. If you're in it for the long haul, you'll probably need to find a way to get it all out of your head once in a while. Don't be afraid to let loose. Then again, I probably didn't need to tell you that.
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