Good Links

- Dutch Housing Prices over the long-term - Risk Management Equity Derivatives House of the Year (that would be Soc Gen!)

- If you are going to fail in the US, fail big, not small.

- Elevation Partners blowing LPs money

-More Soc-Gen There is more to this story. Something does not feel right.

- "The current crisis is not only the bust that follows the housing boom" Mr. Soros declared. "It's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency."

SG Fraud

From Dealbook (and everywhere else)

The French bank Societe Generale said Thursday that it had uncovered an exceptional fraud by a trader that would cost it 4.9 billion ($7.1 billion) and that it would seek new capital of about $8 billion.

The company, the second-largest listed bank in France, said in a statement that the fraud had been committed by a trader in charge of  "plain vanilla" hedging on European index futures.

The trader, who was not identified, "had taken massive fraudulent directional positions in 2007 and 2008 far beyond his limited authority," the bank said.

"Aided by his in-depth knowledge of the control procedures resulting from his former employment in the middle-office, he managed to conceal these positions through a scheme of elaborate fictitious transactions."

The bank said the fraudulent positions had been closed and the trader suspended. The incident has been thoroughly investigated and found to be a case of "isolated fraud."

How is that possible with anything resembling a risk management system?

Turmoil Today

Today seems like a poster child day for the issues we predicted last week. Fed slashes 75 bps so we are 75% there to our 100%, 100 bps prediction and 37.5% of the way to the 60% / 200 bps prediction

Global equities markets in freefall as they discover re-coupling.

Look at Kedrosky for why decoupling hasn't exactly happened...

Recent Good Links

Banker's pay is deeply flawed (Financial Times) aka how to disguise beta as alpha.

In reality, there are only a few sources of alpha for investment managers. One of them comes from having truly special abilities in identifying undervalued financial assets. Warren Buffett, the US billionaire investor, certainly has it, yet this special ability is, by definition, rare.

A second source of alpha is from what one might call activism. This means using financial resources to create, or obtain control over, real assets and to use that control to change the payout obtained on the financial investment. A venture capitalist who transforms an inventor, a garage and an idea into a fully fledged, profitable and professionally managed corporation creates alpha.

A third source of alpha is financial entrepreneurship or engineering – creating securities or cash flow streams that appeal to particular investors or tastes. As long as the investment manager does not create securities that exploit investor weaknesses or ignorance (and there is unfortunately too much of that), this sort of alpha is also beneficial, but it requires constant innovation.

Alpha is quite hard to generate since most ways of doing so depend on the investment manager possessing unique abilities – to pick stocks, identify weaknesses in management and remedy them, or undertake financial innovation. Such abilities are rare. How then can untalented investment managers justify their pay? Unfortunately, all too often it is by creating fake alpha – appearing to create excess returns but in fact taking on hidden tail risks, which produce a steady positive return most of the time as compensation for a rare, very negative, return.

What Does Goldman Know That We Don't? (Bloomberg) Michael Lewis on Goldman's big counterbet on subprime

Counterparty Risk is going to rear its head (WSJ)

The World Rides to Wall Street's Rescue (WSJ)

Should banks take back their bonuses? (Dealbook)

Surging hotel prices worldwide (NY Times)

Rising timber prices lead to people stealing trees (NY Times)