Memo from Howard Mark - On The Couch

On the couch

I woke up early on Saturday, December 12 – the morning after a day of significant declines in stocks, credit and crude oil – with enough thoughts going through my mind to keep me from going back to sleep. Thus I moved to my desk to start a memo that would pull them together. I knew it might be a long time between inception and eventual issuance, since every time I dealt with one thought, two more popped into my head. In the end, it took a month to get it done.

Professor Richard Thaler of the University of Chicago is a leading expert on behavioral economics and decision-making (in fact, he’s such a significant figure in the field that he was given a cameo role in the movie The Big Short). He opens his new book, Misbehaving, with Vilfredo Pareto’s assertion that “the foundation of political economy and, in general, of every social science, is evidently psychology.” I’d apply that equally to the not-so-scientific field of investing.

It has been one of my constant refrains – dating back all the way to “Random Thoughts on the Identification of Investment Opportunities” (January 1994) – that in order to be successful, an investor has to understand not just finance, accounting and economics, but also psychology. A thorough understanding of how investors’ minds work is essential if one is to figure out where a market is in its cycle, why, and what to do about it. For me, the markets’ recent behavior – certainly on December 11, but also at other points in 2015 – reinforces that observation.

This memo is my attempt to send the markets to the psychiatrist’s couch, and an exploration of what might be learned there.......

Highlights-

"In the real world, things generally fluctuate between 'pretty good' and 'not so hot.' But in the world of investing, perception often swings from 'flawless' to 'hopeless.'" 

LIBOR days are numbered

Libor alternatives it would be either OBFR, Overnight Bank Fund Rate, or GCRR,General Collateral Repo rate.

Orderly liquidation of bankcrupt Banks

FED is proposing new measures  to prevent the chaotic crash of banks and  orderly liquidation of financial institution can be done.

Introduction of GC(General Collateral) repo

GC Repos

Understanding the US Interbank GCF Repo® Market

Intrabank and Interbank GCF Repo-

The “intrabank GCF Repo” trades that use the same clearing bank can settle without the need for the clearing banks to communicate. In contrast, “interbank GCF Repo” involves both clearing banks and requires some communication between the two. This difference is important because intrabank trades mostly conform to the road map for repo settlement set forth by the Tri-party Repo Infrastructure Reform Task Force, but interbank trades don’t. Indeed, settling an interbank GCF Repo currently requires the clearing banks to extend large amounts of credit.

RBI released consultative document for the uncleared margin requirement

The Reserve Bank of India released a discussion paper on margining un-cleared OTC business, in the same framework as others. The RBI intend to mandate the schedule based approach to IM, unless they give approval for a VaR based approach. 

Will there be any benefit for Banks to create highly expensive infrastructure for IMM models

BCBS has recently released consultative document, Reducing variation in credit risk-weighted assets – constraints on the use of internal model approaches. It proposed that banks be barred from using internal models when they calculate how risky certain assets are. Lending to other financial institutions and large companies, and holding equities are the areas most affected.

The proposed changes to the IRB approaches set out in this consultative document include a number of complementary measures that aim to:
1.  Reduce the complexity of the regulatory framework and improve comparability
2. Address excessive variability in the capital requirements for credit risk.

Specifically, the Basel Committee proposes to:

• Remove the option to use the IRB approaches for certain exposures, where it is judged that the model parameters cannot be estimated sufficiently reliably for regulatory capital purposes 
• Adopt exposure-level, model-parameter floors to ensure a minimum level of conservatism for portfolios where the IRB approaches remain available 
• Provide greater specification of parameter estimation practices to reduce variability in risk weighted assets (RWA) for portfolios where the IRB approaches remain available.

Under the proposal, banks will have to use a standardised method of calculating the riskiness of loans to financial institutions and to large corporates with assets of more than €50bn. The Basel group believes there is so much publicly available information on the credit risk of such institutions, that banks are rarely able to provide a better estimate than an approach standardised by regulators.

These proposed regulation are already dubbed as BASEL IV by street. Banks have already spent billions of dollars to comply with the plethora of regulatory changes after the 2008 financial crisis.
Argument is if banks will not be able to use the IMM models for most of the derivative portfolio, as most of the derivative trades happens among financial firms, then how much benefit will banks have in developing highly complex IMM models.

The case for more capital

Good read on how banks focused only one half of the ratio by de leveraging their balance sheet instead of raising more capital as well.  
It’s a capital ratio of two halves..

The case for more capital

Why bank capital matters for monetary policy

This week's reading

How To Think, And Act, Like A Software Executive....

With distributive technology any business can be impacted or even can be wiped out hence I agree wit what has been written by Vijay Gurbaxani in the latest issue of Harvard Business Review.

“The current business environment requires all leaders to view their companies as software businesses — and think like software executives,”

Intel CEO Banking Company's Future On 5G, Moore's Law, The Cloud, and IoT...

Jayadev Galla Takes Indian Battery Company Amara Raja To New Heights...

Key Mechanics ofThe U.S. Tri-PartyRepo Market


The Strange Relationship Between Power and Loneliness