You can get the party going and speculate. If you are
right, you get the profits. If you are wrong, Greenspan
will save you. When you speculate on 1000 shares of a
stock and own 10 puts, you are hedged - if your stock
declines, your puts will save you. Greenspan does
the same favor for big banks, free. Normally, you would
have to pay a premium for the put -g-. Of course, Greenspan
put applies to big banks and speculators only, because
the Fed is worried about the system. Basically, it's a
green light to speculate. He may not "save" them,
literally, but lower rates, etc. I'm sure some big
banks are even informed in advance of the Fed actions.
One example is Goldman, who bought a bundle of 30-year
treasuries right BEFORE the announcement that the treasury
won't issue new 30-year bonds.
Naturally, when it shot up, and they were
leveraged long to the hilt, they made a bundle. At the same
time, I heard 70-80% of hedge funds lost all 2001 profits,
and more, during that event.
This was investigated, since Goldman bought before the
announcement, but I think nothing was done in the end.
Greenspan does not give $$$ to banks in trouble, although
apparently he loans them $$$ really cheap. The
issue is a bit more subtle.
The key to derivatives markets is liquidity. Greenspan is
prepared to reliquify the markets at any time when there
is lack of liquidity. He has proven to do so
time and time again.
Basically, the theory of efficient markets always
gives you profits in derivatives, UNLESS you have
lack of liquidity. So, you are like "the house" in
gambling -g- In gambling, if you win big time, the casino
may be broke. Here, they are protected by the Fed against
that. He comes out and shoots the big winner -g-.
And here is how he does that. The
model of Black-Scholes of efficient market is
fundamentally wrong. Free market has never been efficient -
it's fractal. This means that the situations of the lack
of liquidity sometimes arise in free markets. (This also
means that TA works, to a certain degree :-) )
These situations are very rare, but their
occurrence would wipe out "the house". The role of
Greenspan was to alter the natural course of the markets,
and to prevent these rare events of lack of liquidity
from happening. Since the house loses only in case of
lack of liquidity (that's when Black-Scholes formula stops
working), he basically gave them a no-loss guarantee.
That's why derivative markets keep growing, and credit
derivative market (rates are directly manipulated by the
Fed) is the largest of them all - 150 Trillion dollars
notional value. Banks would say it does not matter, since
this is not the $$$ that change hands, but it does. It
shows how huge the credit bubble now is, and it's getting
bigger and bigger. |
