Wednesday, March 26, 2008

More Bear Lessons

“increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago.” Alan Greenspan, probably the most influential banker/economist in the last half century said this in 2005 (from Economist). Yani, even with all the data at his fingertips and a brain to match, he still could get things so wrong. That is a powerful lesson for all of us investors whether we are speculators or quants.

You have to feel sorry for those Bear Stearns employees who owned a third of its shares. Most of these investment banks basically force you to take their equity (i.e. its part of your bonus upende usipende). 2ndly, you can't sell the shares for at least 5 years. So you may get to year 3 in your career at Bear Stearns (this is when most peeps leave) look at your equity-holdings and discover you have something like £20/30k worth of shares. So you are like, I'll stay on until year 5 hoping to grow the stake to a well rounded £50k. On Monday morning, you learn your stake is now worth £5k or less. The lesson is all those profits sitting in your CDS account are just like a mood swing until you sell the shares and pocket the profits.

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