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» One Touch Football - Archive » World » More Bears for Ursus (and GY) (Page 5)

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Author Topic: More Bears for Ursus (and GY)
Reed
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I'm not very wise about all of this stuff, so I don't really understand, but am I right in believing that BS' implosion is basically a Wall Street version of this?
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ursus arctos
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A lot of it is convention in the financial markets, but some of it is precision.

Precision comes in trying to distinguish between a cut of 0.75% in a given rate and a 0.75% decrease. The two sound the same but don't mean the same thing, even though they are often used interchangably. In this case, a cut of 0.75% in the rate cut the rate itself by a third (from 3.00% to 2.25%). Talking about "basis points" allows one to avoid this problem, while at the same time providing a veneer of financial sophistication.

It can also be useful when talking about small increments. "5 bp" is easier to comprehend instantly than "0.05%" and less subject to dropping a digit or misplacing the decimal point.

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ursus arctos
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And yes, Bear's demise was at its core the result of a run on the bank.
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Reed
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So it only applies to rates? That makes sense. Because a 0.75% cut from 3 would be 2.98 something.

But I'm still confused by your statement that it's a drop of one-third.

3.00 to 2.25 is a drop of a quarter (25%, 0.25, 1/4, etc), not one third.(3-2.25=0.75, 0.75/3=.25)
Going from 2.25 to 3.00, would be a 1/3 increase. (3-2.25 =0.75, 0.75/2.25=.33333)

I had a hard time explaining this to kids when I taught the SAT. I also have had a hard time explaning it to reporters who, ostensibly, went to college.

Perhaps this is what you mean. The difference between 3.00 and 2.25 is 75bp. The difference between 2.25 and 3.00 is 75bp. The same regardless of which direction you're going.

[ 18.03.2008, 21:26: Message edited by: Reed ]

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ursus arctos
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No, you're right. I just got the math wrong (shows how having to rely on a 12c calculator to do stuff like that for 15 years can turn your brain to mush).

75 is one quarter of 300. It is one third of 225 and an increase from 225 to 300 would have been an increase of one third (which is another way of showing the usefulness of the basis point concept as being direction neutral).

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Ginger Yellow
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I don't really think it has much to do with "a veneer of financial sophistication". Credit markets deal mainly in spreads. What matters is less the absolute yield, than the amount something yields over a benchmark - Libor, mid-swaps, Treasuries, Gilts etc. If your funding cost is tied to one of those benchmarks, and it often is, what you care about is how much your investments make in addition to that, not how much they make in total.

Even if your funding isn't tied to a benchmark (say you're an unlevered fund) the spread will tell you how much you're being paid for taking credit risk compared to "riskless" equivalents like government bonds.

Finally, spreads (historically - not at the moment) are pretty low - less than 1 percentage point. It would get very tedious to have to stick "0." in front of every single number you used.

[ 18.03.2008, 21:47: Message edited by: Ginger Yellow ]

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ursus arctos
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That's absolutely true within the credit markets themselves, but when the "mainstream media" start talking in basis points, I think a good part of it is trying to "talk the talk".
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die grosse linke Hand
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Sounds like this is all moving a little more into the world of GY at the moment - Bear is still finding itself at the mercy of the markets.

Bear stock at $6 (3x offer) - people think maybe Bear are looking to vote against the offer? Speculation is now that this is people hedging CDS trades. They sold protection on Bear at 1000, and now - if it becomes part of JPM - it trades at 350. That 650 profit - how do you lock it in? You make sure that Bear gets bought by JPM, so the stock is being inflated by hedge funds wanting to accept $2.

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Antonio Gramsci
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What's a CDS trade?
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Ginger Yellow
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Credit default swap.
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Ginger Yellow
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"You make sure that Bear gets bought by JPM, so the stock is being inflated by hedge funds wanting to accept $2. "

It's a dangerous game, surely. If you buy yourself voting rights you're inflating the price, which makes other shareholders less willing to take the offer. And of course you lose money on the shares. I can't be bothered to do the maths to figure out how the maths works out, but I'd have thought you'd need a pretty huge exposure to BS to make it worthwhile.

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ursus arctos
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I like the bondholders buying shares scenario better for just that reason, but then I don't know what the CDS volume was like. There are a whole lot of bonds out there, though.

Though even that scenario has the same whipsaw effect that GY notes.

The whole episode demonstrates just how it hard it can be to value investment banks in meltdown scenarios.

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Ginger Yellow
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I strongly suspect there are more CDS than bonds, and that the protection sellers are on average more likely to take an equity stake than bondholders.
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