Charles Davi
Charles was born in Astoria Queens, New York. A mathematics and science junkie from the start, his stated profession of choice at the age of 5 was "mad scientist." His passion for numbers and absurd career choices has stuck with him his entire life. Having an obsession with all things mathematical, Charles is also a music fanatic. He plays 4 instruments, composes, and refuses to go a day without listening to Brahms' Quartet for Piano and Strings No. 1 in G Minor (well, only the 4th movement). Charles received his J.D. from New York University School of Law and his B.A. in Computer Science from Hunter College. In his free time, he has been working on a macroeconomic theory of price rooted in John Von Neumann's work in game theory. He blogs at Derivative Dribble.
Recently by Charles Davi
Nov 9 2009, 2:30PM
Understanding Custom OTC Derivatives
Most OTC derivatives are highly standardized, heavily traded products that are more fairly described as unfamiliar than complex. Nonetheless, a small corner of the market comprised of customized, or bespoke, trades has captured the imagination of both the public and the press. The descriptions put forth to date muddle the scale of the market, purportedly in the hundreds of trillions of dollars, with words like "complex" and "arcane," all to convey a sense of simultaneous condemnation -- the result of some vague concept of inherent mischief -- and unholy admiration for the wizards who put these "black boxes" together. In an effort to tone down the more florid descriptions of bespoke trades, what follows is introduction to the market conditions that cause certain market participants to prefer bespoke trades to more standardized alternatives.
Oct 7 2009, 3:20PM
How Do Bubbles Create and Kill Jobs?
The internet economic debate du jour is summed up nicely by economist Paul Krugman as follows here:
why [doesn't] a housing boom -- which requires shifting resources into housing -- ... produce the same kind of unemployment as a housing bust that shifts resources out of housing.
And here:
why ... isn't [ there ] mass unemployment when bubbles are growing as well as shrinking -- why didn't we need high unemployment elsewhere to get those people into the nail-pounding-in-Nevada business?
His point is, on balance, both booms and busts involve the reallocation of resources, yet only busts seem to produce mass unemployment. While Krugman and Arnold Kling* are wrapped up in a debate about how the question influences our understanding of government stimulus, I'd like to simply offer up an answer.
Aug 5 2009, 12:30PM
Naked Credit Default Swaps: Exposed!
The term "naked CDS (Credit Default Swap)" has been tossed around a lot lately, with little to no examination of the etymology of the term. You may have heard of "naked short selling" of stock, and a bit of Google action will tell you that naked short selling is generally illegal. So, you'd be inclined to think that naked CDS must be similar in nature to naked short selling, and inevitably conclude that naked CDS would be illegal but for Wall Street's tentacles. But of course, you'd be wrong.
Jul 16 2009, 1:00PM
How to Understand The Derivatives Market
In 2006, few people outside of the derivatives market had used the word "credit default swap" in casual conversation. By 2008, it had become an inescapable household term. People continue to throw around buzz words gleaned from the pink pages of the FT, but as my colleague, Daniel Indiviglio recently asked: Does anyone out there really understand what the Over-The-Counter (OTC) Derivatives market is? Since I consider myself the resident derivatives wonk at Atlantic Business, I felt compelled to respond. But rather than focus on any particular instrument or issue, I thought it would be best to focus on the overall structure of the market - who the people in the market are, what they do, and what relationships they have to each other - and leave the banker-bashing to somebody else.
Jun 24 2009, 9:04AM
Obama's Financial Overhaul: What You Need to Know
Joe Nocera has said his peace with respect to Obama's proposed overhaul of the financial system. And in doing so, he expressed disappointment with several aspects of the proposal. In particular, he is displeased that the proposal "doesn't attempt to diminish the use of ... bespoke derivatives." That certainly sounds ominous. But it's also not true.
Jun 17 2009, 10:55AM
The Shadow Banking System That Operated In Broad Daylight: Part I
Mark Thoma and Brad Delong are completely entrenched into the position that this crisis was brought on by the nefarious "shadow banking system." In fairness to Thoma, he is trying quite sincerely to argue his point, and I think my disagreement with him stems mostly from my objection to labeling particular aspects of the financial system as "shadow banking." That said, I do take issue with a few of his substantive points. Rortybomb does a fine job summarizing the recent history of this debate, highlights some of the strengths of Thoma's position, and also clarifies the debate by providing a reasonable framework for what it is that people are referring to when they talk about the "shadow banking system."
As for Delong, his argument takes the form of an excursion through unmitigated nonsense, as he boasts his deep knowledge of comic books, and little else. As such, in this post, I'll begin with Delong's argument, since it is completely unfounded. In the next post, I'll take on Thoma's position, as it warrants more attention and represents an opinion held by a lot of intelligent people. I just happen to disagree.
Jun 16 2009, 9:00AM
The "Shadow Banking System" Did Not Cause This Crisis
In an article for the Washington Post,
Mark Thoma offers us a peek into a financial system shrouded in
mystery, a "shadow banking system," full of complex financial wizardry,
designed to sap the world of its precious bodily fluids
liquidity. In his view, our current financial malaise is the product
of this shadow banking system, which is itself a financial
Frankenstein perpetuated by secrecy, deregulation, and complexity:
Jun 11 2009, 10:55AM
Hey Financial Times, Get Your Derivatives Lingo Straight!
require clearing of "all standardized OTC derivatives through regulated central counterparties," [it] marks a sweeping change to the way OTC derivatives are handled, implying a shift away from the dealers at banks who brokered such contracts to the formal exchanges that have long jealously eyed the huge OTC markets.That is false. A CCP is not an exchange. A CCP is somewhere that trades get moved to after they've been executed.
May 29 2009, 1:20PM
Could Government Intervention Help Markets Function Better?
If free markets never fail, there's no inherent need for government intervention, though we might object to the resultant wealth distribution on moralistic grounds. But if markets do occasionally fail, then it's possible that government intervention could be used to realign incentives, and "nudge" the market to a higher order equilibrium.
May 16 2009, 10:00AM
How NPR Mangled Geithner's Plan For OTC Derivatives
May 7 2009, 11:42AM
Boring Banking Will Not Save You
May 1 2009, 8:54AM
The Sorry State Of The Dismal Science
Apr 20 2009, 11:41AM
Credit Default Swaps and Control Rights, Redux
Felix Salmon and I are usually on the same side of the jury box when it comes to the trial of credit default swaps. However, it appears we have reached an impasse concerning creditor control rights in the context of restructurings and bankruptcies. While that sounds like an awfully narrow issue to quibble about, the policy implications of this seemingly obscure issue are far reaching and call into question both the orderly functioning of the debt markets and the soundness of the current bankruptcy regime.
Apr 17 2009, 5:19PM
Credit Default Swaps and Control Rights
Megan McArdle asks, "Do We Hate Credit Default Swaps for The Wrong Reasons?" As Megan notes, blaming credit default swaps for all kinds of things is quite fashionable these days, since simply uttering the term makes commentators feel sophisticated. While this is itself a topic worthy of discussion, the more interesting point in Megan's article concerns how credit defaults swaps affect the incentives of bondholders in the context of restructurings.
Apr 14 2009, 8:43AM
The Art of the Banking Controversy
Now that we are well into the depths of a recession, banker-bashing is all the rage. In addition to being fashionable, these "arguments" have an air of credibility about them, given the dire context in which they are made. As a result, the debate over regulating the financial sector is being recontextualized by portraying Wall Street as little more than a vacuous pig-pen. This view is informed by a grand equivocation, which lumps together all of finance under one roof, somewhere on Wall Street, where bankers convene and discuss how they can further redirect the world's resources towards their pockets. And the shapeless anger that follows from this view has consumed not only the main stream media, but bloggers as well.
Brad Delong takes the view that both compensation and profits in the financial sector are wholly unjustified. Matthew Yglesias agrees. Another even more dubious theory, also espoused by Matthew Yglesias, is that those in finance are morally inept. (You can find Conor Clarke's response to Yglesias here). Together, Delong and Yglesias employ straw men, false dichotomies, equivocation, conflate coincidence and causation, and in general treat a complex subject with glib answers that suggest the authors have no concern with getting it right, or have just finished reading Schopenhauer's, "The Art of Controversy."
Apr 10 2009, 3:01PM
The Regulatory Pendulum and Electoral Guillotine
The conventional wisdom is that market regulation goes through
booms and busts as the public oscillates through its love-hate
relationship with the capitalist ethos. When all is well, high-earning
executives are the embodiment of capitalism's well-oiled wealth
distribution machine at work. When all is not well, they are the
embodiment of the structural deficiencies inherent in a capitalist
society that favor those on top. Moving in sympathy with public
sentiment, the regulatory pendulum swings from what some consider under-regulation to what others consider over-regulation, blowing past the inevitable resting point, and pausing only at the extremes.
Apr 8 2009, 4:36PM
The Unbearable Lightness of Nassim Taleb
Looking beyond Taleb's absurd delivery, the substance of his policies is, in large part, absent, and where present, addresses the real issues at play in a superficial and borderline whimsical fashion. It is unclear whether this is the product of haste, or the product of a complete lack of command over the issues and concepts. For example, Taleb states that:
Mar 28 2009, 8:17AM
The Kling and I on Credit Default Swaps
Arnold Kling and I will probably never agree when it comes to credit default swaps (CDS). Kling and I have had words in the past over CDS, and so have Kling and Felix Salmon. But so long as spirited debate proves interesting to us and our readers, I'm happy to participate in that hallowed, nerd-sport-of-choice: arguing over the internet.
Kling seems convinced that because he cannot conceive of a way to hedge credit risk using the long end of a CDS (the protection seller's end) it follows that CDSs have no "natural seller." In short, his position is the following:
"[N]o institution was in a position to sell credit default swaps as a natural hedge against its other business."
Mar 27 2009, 10:09AM
Why derivatives are your friends
With all the accusations of excessive speculation on Wall Street, the media has certainly done its fair share of speculation as to what goes on in the structured finance market. And given all the public outrage, this is information the press should should get straight before they report.
Like every trade, the world of structured finance has developed its own little language describing the things that people in the market do. The first step to understanding that language is building a vocabulary. I would say that most folks in the media have developed to the point where they can identify, point at, and grunt towards objects in the structured finance space. But it's not just the media that doesn't understand structured finance. It's economists, pundits, and perhaps most ironic, financiers! Even that giant of finance, George Soros has loused up explanations of how credit default swaps work. I've called out economists in the past for their mumblings on credit default swaps and the like, and so has Megan McArdle. This is a serious problem because economists, finance giants, and the like command a level of authority that my local TV news anchor does not.
Mar 20 2009, 12:53PM
The rising tide of class conflict
So what got this whole movement started? Aside from obvious causes like crashing asset prices and mass unemployment, I think we can find additional causes by looking to popular culture, how it shaped the public's perception of wealth, and how wealth and the wealthy took center stage, just before they all disappeared.
Mar 16 2009, 4:19PM
The non-event that is AIG's counterparty list
Why is anyone surprised that AIG made substantial payments to large financial institutions? Wasn't the entire purpose of bailing out AIG to prevent the collapse of the financial system? Such a purpose would imply that without a bailout, the financial system would collapse. Therefore, we should expect the result of any bailout made with that purpose to result in substantial payments into the financial system. Since large financial institutions are at the heart of the financial system, we should expect such a bailout to result in substantial payments to large financial institutions. Is the world so devoid of news that such a trifling and obvious result warrants extensive coverage?
Without the report, we could not have known exactly who had received funds. But, we could have used information that was already available and apply categorical logic (or common sense if you prefer) to infer what sector was on the receiving end, as I have demonstrated above. But then again, it appears logic, common sense, and facts have nothing to do with public policy or debate on this crisis. Rather, populist rage, childish blame, and jealousy are firmly in the lead.
Mar 5 2009, 8:30AM
Home prices and the reality of mortgage modifications
It seems that we have taken as an axiom the idea that if the price of a home drops below the face value of the mortgage, the borrower will default on the mortgage. That sounds like a good rule, since it's got prices dropping and people defaulting at the same time, so there's a certain intuitive appeal to it. But in reality, it makes no sense. Either the borrower can afford the mortgage based on her income alone or not. However, it does make sense if you also assume that the borrower intended to access the equity in her home before the maturity of the mortgage. That is, the home owner bought the home with the intention of either (i) selling the home for a profit before maturity or (ii) refinancing the mortgage at a higher principle amount.
Feb 24 2009, 7:13AM
Thoughts on the banking plan
Feb 4 2009, 4:36PM
Surely you're joking, Mr. Soros
Jan 29 2009, 10:15AM
Demon credit default swaps: the case of the synthetic security
Mortgage backed securities allow investors to gain exposure to the housing market by taking on credit risk linked to a pool of mortgages. Although the underlying mortgages are originated by banks, the existence of investor demand for MBSs allows the originators to effectively pass the mortgages off to the investors and pocket a fee. Thus, the greater the demand for MBSs, the greater the total value of mortgages that originators will issue and ultimately pass off to investors. So, the originators might front the money for the mortgages in many cases, but the effective path of funds is from the investors, to the originators, and onto the borrower. As a result, investors in MBSs are the effective lenders in this arrangement, since they bear the credit risk of the mortgages.
Copyright © 2010 by The Atlantic Monthly Group. All rights reserved.