Foreign Policy Kills The Bank of Dad

One of my earliest posts explained the function of The Bank of Dad.  By setting artificially high interest rates, this dad thought he could encourage better savings habits.

This grand experiment has failed.  Not for the reasons you might think.  The kids understand it.  Most of the time it works.

However, foreign policy has recently killed the Bank of Dad.  Imagine the EU with an extremely generous, altruistic Germany.  Oh, and a bankrupt Greece.  Now, substitute "Grandchildren" for "Greece" and "Grandparents" for Germany.  And, of course, Dad is some combination of the IMF and European Central Bank.  You see where this is going?


Encouraging austerity measures fails...miserably...especially for an almost-nine-year-old boy with wonderful, generous grandparents, and Chanukah conveniently falling two weeks before a New Year's Eve birthday! 

So, who benefits?  The Man, that's who!

On second thought, maybe the Bank of Dad needs more government-like unsustainable policy?  I could crank rates up so high that the kids still saved beyond December 31st.  Unfortunately, unlike a government that steals from the young to give to the old, that plan would steal from the old to give to the young.  I suppose the bank could always default on depositors!

Failing to Protect Our Borders

This was my first blog post. I wrote about gift cards.  I hate them.  You know why I hate them? They are terrible credit risk.  And, I now have empirical evidence.

My daughter walked into my office while I was cleaning today.  Cleaning my office is a serious exercise.  She picks up a random pile of crap, trying to help.

"Uh, dad, I think we have a problem here!"

"What?"

"I think you're a little too late on this Border's gift card.  Maybe you should have given it to me before the stores went bankrupt?"

And there you have it.  Case closed.  I can now confirm that gift cards are a terrible risk.

At least this morning I reduced my Barnes & Noble inventory by one for my son's friend's birthday gift.

First National Bank of Walmart

Nearly two years ago, I wrote that we should allow anyone who wants to own a bank own a bank as long as they agree that it will have 100% reserves.  In other words, they manage cash, they don't lend money.  Pure banking is a logistics and technology exercise.  You want safe?  That bank is safe without FDIC and without government backstops of any other sort.

In that post, I even suggested that Walmart would step up immediately and deliver deposit and cash management services to their customers.  They are, after all, the finest logistics company in America.  What does a bank do, after all, other than stock an inventory of exactly 11 items, and make sure that they never run out of those 11 items.  (In case you're counting: five small metal discs, six small sheets of paper.)  Oh, then they need to make sure they keep track of customers paying for those products.

So, I'm very pleased to see they're listening, or at least trying, according to this New York Times story.  Free Walmart from the shackles of regulation!  Let them own a real bank with 100% cash and reserves.

Insider Trading: What Are The Odds?

The latest hoopla over potential insider trading at SAC doesn't look good...for the prosecutors.  Anyone can tell you SAC trades a lot.  If you trade a lot (I mean a whole lot!) you will have insider-trading-like success if someone picks through your every trade--after the fact!

Here's a thought experiment.  Start with 10,000 stocks.  On any given day, for any given stock, the price either move up or down by 1% (49.9% probability each), or move up or down by 25% (with 0.1% probability each.)

Suppose every single day you pick 100 stocks to buy, that you will subsequently sell the next day.  You'd expect every day that 0.1 trades would look like insider buys because you'd buy right before they jumped by 25%, and you'd sell the day they jumped.  Similarly, You'd expect the same number of insider sells. 

In ten years, regulators flagged 18 trades by SAC.  In my simple example, you'd have 18 in less than a year.

Wait, you say, SAC's flagged trades happened many days in a row.  Okay, fine.  Don't buy and sell immediately.  Randomize each day, so that there is a chance you randomly accumulate a position over three days, followed by selling for three days to unload the position.   This is like the probability of flipping a coin (HHH) followed by (TTT) (or visa versa) at the same time the underlying stock falls in the 0.1% chance of a 20% move up (or down) on day three.

Rare indeed.  I bet 18 times in 10 years is not so far off, statistically speaking.  (But I'm not smart enough to do that math.)

Scary Times, Indeed!

In this Wall Street Journal column, which includes the now-ever-present depressing (and depressed) mug of John Paulson, the author notes that this is a scary time of year for hedge funds.  Many face their notice periods for year end redemptions by their investors.

This is truly scary.  Imagine you work at a desk, in an office.  And, you get paid for this.  If you perform successfully, you might even get a bonus.  One day your boss fires you.  That's tragic.  Suppose you say to your boss, "No problem.  I'm out of here.  However, as you might recall, you have to keep paying me until I say my work is done, and I clean out my office.  Oh, and I no longer have anywhere to move the stuff that's in my office, so I'll just sit here with my tchotchkes.  Call me in two years.  Don't sue me, please, because I can pay my lawyers with your corporate card."

This is essentially the scary situation faced by hedge fund managers.  If investors "ask" for their money back at the same time as others, no one gets their money back.  The hedge fund managers suspend redemptions, and keep charging fees as long as they feel appropriate.

The only Halloween surprise in sight is just how poorly investors will be treated (and tricked) by those entrusted with their assets.