<p>I think poets post 14 explains it</p>
<p>The brought in Dr. Goldman to take positions. I doubt they meant to take 40-1 postitions, but once you have Dr. Goldman in charge, you tend to believe you are too big to fail. Corzine had no experience with being forced to quickly unwind a position. In the past, in situations like this, he’d had 7 months to a year to get out of it.</p>
<p>I wrote a post about GS earlier and deleted it because I thought I wrote a little too much information.</p>
<p>GS has raised margin requirements with the traders they clear…at least in my small world. I find it funny that while GS is getting stricter…Corzine went crazy.</p>
<p>Corzine is not the only guy that would do this if given the opportunity. Thousands and thousands of traders would do what Corzine did if given the opportunity.
This is one reason GS is getting stricter.</p>
<p>When a trader is paid based on what he makes…the system is set up for that trader to take excessive risk. I still see this happening. It’s tough, because you want to motivate your traders to make more money…and at the same time take risk that can be handled.</p>
<p>It’s tough finding that balance. As soon as you say we want you to make more money…and we are restricting your risk…the trader looks at you and says, “You are restricting what I can make”. And that’s true.</p>
<p>Anyway…what GS is doing is cutting their firm’s risk when they increase margin requirements.</p>
<p>dstark,
you are referring the “outside” traders, sort of the customers or account/deposit holders in your post above?</p>
<p>I am not in the know.
Please clarify: Is a clearing and trading account firm like MF allowed to trade on its own behalf with the accounts/customer trader money (analogous to the deposits of a bank)???</p>
<p>Yes…when I am talked about the traders and GS…I was not talking about GS’s own traders. (I had a feeling I wrote that poorly). These traders are clients of GS. GS is stricter with those clients.</p>
<p>I don’t know what GS is doing with its own traders.</p>
<p>No. As I understand it…MF was not. </p>
<p>There are distinctions with these firms. I don’t know all the differences. A firm can invest some of the client’s money. But the firm can’t commingle funds…
This part of the financial world…these rules…reading the rules…is very tedious. I have no interest.</p>
<p>Perhaps the experts here can point out why it is the traders in these big firms do not practise risk management like us little guys. Why is it that they do not know how much they can afford to lose?</p>
<p>Can someone talk about the risk of something similar happening in a more mainstream company like Vanguard or Fidelity. It you have an account with mutual funds, ETFs, etc., is it possible for the company to siphon off the funds for some speculative play and leave you holding nothing?</p>
<p>I think the risk…is close to absolute zero…Different businesses…different mindsets at Vanguard and Fidelity… Vanguard and Fidelity are not trading for their own accounts.</p>
<p>I think the reason why these other financial institutions aren’t paying as much attention to risk is because the people who work for these companies get paid by how much money they make…</p>
<p>If you are going to tell somebody if you make X you wil get paid Y…but if you make XX…you wil get paid YYZ…people are going to try to make XX.</p>
<p>plus…they think they are smarter than god…and their models won’t fail…and if you make something trading small…just think how much you can make trading BIG…</p>
<p>If I can make 1 million using no leverage…look how much I can make using 40 to 1 leverage…</p>
<p>“I think the reason why these other financial institutions aren’t paying as much attention to risk is because the people who work for these companies get paid by how much money they make…”</p>
<p>and they should be fired for how much they lose!</p>
<p>Some of them do get fired…If you don’t produce…you are out.</p>
<p>Some of these companies are brutal…</p>
<p>Some of these companies…you get into your 40’s…and you don’t get to a certain level…</p>
<p>See ya.</p>
<p>I think there is a firm or two…that fires 10% of their employees every year…but maybe that is just talk. </p>
<p>We just fired somebody on Friday…well he quit…but…he kind of had no choice…His numbers were ok…but he wanted to make a lot more…and he was told no and he should reconsider his request…</p>
<p>And he said,</p>
<p>“See ya”.</p>
<p>By the way…some traders are pretty good…</p>
<p>Poetgrl,
What is your take on why some of the people at the top firms seem to take excessive risk?</p>
<p>Dstark-- </p>
<p>The problem, really, is that there’s no model which prices liquidity risk. It takes a long time for even the best options traders to understand liquidity risk. What corzine did was ridiculous. He took one bet. Even leveraged 10 to 1 that’s idiotic.</p>
<p>But, most options traders don’t start out leveraged at 30 to 1. They just get into a situation they can’t get out of quickly enough because of illiquid markets and the leverage goes up and up and up, and then it’s a race against the margin call. Even with a great position, when it starts to go against you, even if eventually it’s going to go your way, if you don’t have enough “time” you can get forced out at bad prices. </p>
<p>You go to bed leveraged 10 to 1. Wake up leveraged @ 15, and before you can get out of it, it’s 25. You need to figure out how to price liquidity.</p>
<p>Guys who were at places like Goldman don’t even understand they can run out of time. But, essentially, that’s really what happened to LTCM. They had one point where they could have gotten out, and then, when Russia defaulted, all there other spreads went crazy and it was too late. Race against the clock. It wasn’t even that they were wrong, just that they were wrong about the amount of risk they were “really” taking.</p>
<p>That’s a very simple version. Ultimately, though, just like models don’t price human nature, they don’t price liquidity risk.</p>
<p>Dadof3, the rules on segregating customer assets from firm assets are pretty bright-line. That’s the kind of stuff that gets you in REALLY big trouble. From everything I’ve read, MF clearly misjudged the rapidly changing volatility in the foreign bond market and then got burned. But I’m guessing that what will really bring down the hammer is the seg issue.</p>
<p>Corzine is Obama’s buddy… Obama’s “guy on Wall St.”</p>
<p>Poetgrl…I love that post. You are right…liquidity risk…</p>
<p>I have some questions about Poetgirl’s post. I don’t know how places like MF Global are set up, so here goes:
<p>Shadow–</p>
<p>I don’t know what “firms like MF” means. MFglobal was one of the great clearing firms. But, the way clearing firms make money has been significantly diminished, unfortunately. The shareholders of MF decided to hire corzine because they wanted to become more profitable, and they believed, since he was from the past he was from, that he would be able to make them bigger, turn them into a trading house.</p>
<p>Unfortunately, they should have looked more closely at his real past. As a trader, he wasn’t great. Sometimes this happens.</p>
<p>If they used the clearing funds for trading? They broke a very strong and unambiguous law. So far it seems they are still missing 600 million dollars. </p>
<p>As for other firms? I don’t know. There are so many different types of firms which trade for profit because of deregulation. Do you mean GE? Or a big bank? Or a hedge fund? Or a local? Or Harvard or Yale endowments? I don’t know what type of firms you mean. Do you mean farmers or oil companies? Or what …</p>
<p>Some trade money invested by others. To call those people crooks is ridiculous. Nobody forces anyone to invest in a hedge fund. If you don’t like the terms and think it costs too much? Don’t invest there. </p>
<p>I"m opposed to the government bailing out risk takers. But that’s just me. Others would say not bailing out risk takers means not bailing out pension funds and unions, too. It’s more complicated than people think.</p>
<p>What are the details of exactly what they are trading? What type of protective measures could they have put in place to reduce risk? What is meant by liquidity risk for these products?</p>
<p>Liquidity risk is is the risk of not being able to get out of the trade because the side of the market you need to close or hedge either doesn’t exist or is too small…</p>
<p>Trading smaller or having hedges on…could mitigate this…</p>
<p>I know what is meant by liquidity risk but what is it for these products and what are these products? I don’t get why if they could be hedged, they weren’t</p>
<p>In MF Global’s case…</p>
<p>The company did not want to be hedged…the company was making a big bet that they thought would pay off big.</p>
<p>The company was too leveraged.</p>
<p>If you are leveraged 40 to 1 and your asset values drops more than 2.5%…you are wiped out.</p>