At this link I found a video of Doug Dachille, CEO of First Principles Capital Management talking about mortgage refinancing. Here is the clip.

Peter Hancock and CDS

Peter D. Hancock, 52, Chief Executive Officer of Chartis Inc. of Lexington Insurance Company and American International Group, In. is described by a former employer as an "architect" of the derivatives business, to oversee finance and risk, including the insurer's money-losing credit-default swap unit. He has been in this position since March 2011 after 20 years working at J.P. Morgan and being a vice chairman for Key Corp.  

Gillian Tett, a journalist of the Financial Times, wrote a book Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe based on the invention of credit-derivative obligations (CDOs) at J. P. Morgan in 1994.

Peter Hancock and their colleagues came up with a product that is part insurance, part speculative vehicle, and built a market for it – beginning with a transaction in which the European Bank for Reconstruction and Development in 1994 contracted for a modest sum to assume the risk that Exxon (XOM) wouldn’t repay a $4.8 billion line of credit it had borrowed from Morgan in order to pay the fine for its Exxon Valdez oil spill. EBRD made a small but tidy profit; Morgan got the risk off its books and was able to make more loans. From these blue-chip beginnings, a major market was born. Morgan did the hard work, standardizing contracts, persuading regulators of the legitimacy of the transaction, explaining the utility of its new product to customers. Before long Morgan’s competitors were writing CDS insurance on every kind of credit imaginable – including subprime mortgages.

Atypical Property/Casualty CEO

In anticipation of the visit by Peter Hancock of Chartis, I found an article from the Insurance Journal that was a summary of an address he gave as the keynote speaker at a recent meeting of the Professional Liability Underwriting Society (PLUS). His comments reveal that he has very strong opinions about the economy and regulation, as well as innovative ideas on how to drive this industry into the future. The following are a few things that I found interesting and important to keep in mind when he is speaking in front of the class:

Another financial crisis is inevitable:

"No way do I believe that banks, brokerages or insurance companies have learned the lessons of 2008."

"We are cruising for another financial crisis and so we as an industry need to be prepared for that...2008 was a dress rehearsal for the big one."

Regulation is necessary to promote smarter policies and will not hamper economic recovery:

"I don't buy that regulation will delay economic recovery."

Banks and business leaders should "work with regulators to get it right."

Traditional metrics may not be effective in the analysis of fixed costs:

"As we change our business mix and focus on the higher value added and growing parts of our business, that expense ratio can move around a lot and it, to me, is not a particularly useful metric to tell us how well we're doing.

Hancock has recommended using risk adjusted profitability (RAP), a new metric, in order to track and account for variable costs.

Research, especially exploring resources outside of the industry, is essential for development of new products and driving this industry forward:

Hancock has created a new position, a Chief Science Officer, who is responsible for all internal R&D and accessing outside research from other fields of study (e.g. econometrics, physics, medicine, etc).

"There is an enormous opportunity to leverage data and science in insurance."

"So as we look at how do we take data from one industry and apply it to another, or data that is obtained in one country and applying it to another, we have to use a lot of judgment, and not a literal application of the statistics to understand when regimes or their context is different, how do you use that data in a practical sensible way to make good decisions? So it is a blend of art and science. We need poets as well as scientists."

Buying Bonds “Makes No Practical Sense”: Doug Dachille

While doing research on First Principles Capital Management and Doug Dachille, I came across an recent video where Doug talks about the bond market. In the interview he states that it makes no sense to invest in the bond market since the yields on bonds are below the rate of inflation. Doug goes on to say that it makes no sense to give up consumption right now if the money you are saving will be worth less in the future. He states that one of the problems is that both people and the government have spent to much money and not saved enough. In his opinion, only the government will want to buy bonds with this low yields since they can afford to hold them to maturity and they don't have to worry about inflation.
I found two really interesting opinions on this video. First, when the interviewer asks him his opinion on stocks, he goes on to say that he doesn't really own stocks. His advice, which I found really good, was that he believed that you should stick with what you know and understand. He says that when you are investing in something you don't really know it is very possible that you will end up making a wrong decision. Another interesting point was that when asked about the best investment vehicle in fixed income, his response was TIPS since they offer protection against inflation. This reminded me of early classes when we discussed this investment option.
http://screen.yahoo.com/buying-bonds-makes-no-practical-sense-doug-dachille-28853434.html

Option Pricing: The Greeks

Last week, Professor Bodie mentioned the "Greeks" when talking about different ratios/calculations that traders use to analyze the prices of options. I decided to do a little more research and found a website that explains them a little further (found here). Click the links on each ratio for more information.

Option Delta: The sensitivity of the option price relative to changes in the price of the underlying asset.

Option Gamma: The sensitivity of an option's delta relative to a one point change in price of the underlying asset. Gamma reaches its peak when the option is at the money.

Option Theta: Shows how much time value the option loses with each passing day assuming everything else remains constant.

Option Vega: Shows how much the price of an option should change as the volatility of the underlying asset changes. Vega is at its peak when the option is at the money.

Option Rho: The change in the option price relative to changes in interest rates. Rho is largest when the option is in the money and decreases as the option moves out of the money. It also decreases as the option gets closer and closer to expiration.

Options Industry Council

For the average person (ME!) the prospect of making informed investment decisions is daunting. But what about everyone who hasn't had the opportunity to take a class on investing from the man who actually wrote the textbook? Well I found a website run by the Options Industry Council that offers anyone who registers an options investing education.
It offers handy options pricing calculators



A collar calculator

Even a simulator to graph potential future outcomes


In addition to the cool calculators the Options Industry Council website offers a series of courses to teach investors how to invest in options and use the cool calculators. Some of the courses offered are:
Intro to Capital Markets
Options Basics
Options Strategies in Bull and Bear Markets

It is an information rich site and it is free to register. It is worth your time if only to play with the calculators. So visit http://www.optionseducation.org/en.html