Archive for April 28th, 2008

Is this Finance or Greek?

April 28, 2008

JRV Blog pointed to this UBS Shareholder report. In this UBS has given a statement of how the losses occurred in UBS’s books the recent crisis.

On reading the report I actually asked myself, Is this a shareholder report? Though whoever has written it musty have tried his best to explain the events in “English”, understanding the events is mighty complex. It sounds Greek all the way. 

There are so many jargons and acronyms for their various businesses, strategies, financial products that it confuses you what is going on. See this for example,

UBS had significant levels of Subprime investments in three distinct businesses:

  • Within DRCM, there were Subprime positions in the Reference Linked Notes (“RLN “) program, the Asset Backed Securities Relative Value (” ABS Relative Value “) strategy, ABS Collateralized Debt Obligation Trading (“ABS CDO Trading”) strategy and in the US Short Term Asset Backed Portfolio. The business of DRCM was pursued within UBS Global Asset Management (” Global AM “), until DRCM’s re-integration into IB in the second quarter of 2007. Most of DRCM’s “legacy” Subprime positions were subsequently managed by the IB’s Securitized Product Group (“SPG”). More detail on these DRCM strategies is provided at section 4.1 of this Shareholder Report.
  • Within the IB, the Fixed Income business area’s Rates business had Subprime positions.The Rates business had warehoused and retained Collateralized Debt Obligations (“CDOs”) backed by Subprime collateral, including (in particular) Super Senior tranches of such CDOs. These Subprime positions were held principally by the CDO desk within Rates. More detail on this business is set out at section 4.2 of this Shareholder Report.
  • Also within IB the Foreign Exchange / Cash Collateral Trading (“FX/CCT”) business had Subprime positions in the ABS Trading Portfolio, which was a part of the overall Relative Value Trading Portfolio (“RVT Portfolio”) managed by the IB FX/CCT ABS Trading

The entire report is very similar and you just end up flipping pages backwards to see what this particular acronym etc means. Once you get a hang of the business, comes the jazzy financial products and you know you have a headache.

I don’t blame UBS though. The entire financial sector has moved from being simple to abstract and somehow the sector takes pride in the same. Some call it Modern finance and some like John Bogle despise the developments.

That is why we see so much complexity and in a crisis it leads to higher uncertainty. One can only solve a mess (read the government/ regulators or in IMF’s euphemism public sector) if one understands it. Right now it is rocket science at its best. This was the shareholder report, just imagine a technical summary of the events.

I don’t expect any improvements as far as this development is concerned. It is going to become Greek and if people begin to understand Greek then the sector will turn to Latin and so on. The sector believes in creating more and more asymmetry as may be it is a good way to earn their yachts . As it is most people don’t understand finance and don’t ask questions and such developments even widen the gap. So more complex and exotic is going to be the way for financial systems in future.


1. Economist comments on the report

Assorted Links

April 28, 2008

1. Tyler Cowen (of MR) on agriculture crisis. He says free  trade to lower prices in agriculture. Rodrik responds

2. Econbrowser points to Peter Hooper’s (Chief Economist, Deusche Bank Securities) comments on US recession. Interesting graphs

3. WSJ Blog points ECB is ready

4. Ajay Shah on rupee. He also points to a new paper on inflation targeting


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