Here's one of our shorter introductions to Harley Bassman's work:
Although I sometimes poke gentle fun at Mr. Bassman for his proprietary product creation and packaging during his time at Mother Merrill—remember all those cutesy acronyms (OPOSSMS et al) in the '80's and '90's? That was him—although I poke fun at that, his knowledge of debt instruments and markets, particularly mortgage-related structured products (pre-2007), is unrivaled.
From Harley Bassman, The Convexity Maven, at Simplify Asset Management, July 12:
Over a century ago Alfred Henry Lewis observed that “there are only nine meals between mankind and anarchy”; a not unfathomable possibility if the complications from COVID were closer to Ebola rather than Influenza.
Notwithstanding the $801 billion US Defense budget, larger than the next ten countries combined, little effort is required to imagine the result if the workers at Consolidated Edison and the Croton Dam aqueduct were too fearful to punch in.
And while I have little interest in joining the bleating mob of financial pundits whose weak egos require a steady stream of “likes” and “re-tweets”, I will note that our “Rhyme with History” is not 1930s Europe, but rather to 1850s America.
The Federal Reserve Bank (FED) is “behind the curve” and is accelerating their policy actions to catch up to both the economic data, as well as financial market rates and prices; the question we explore today is the potential severity of the resulting unintended consequences.
Jerome Powell, the FED Chair, serves a four-year term at the pleasure of the President. His first term started on February 5, 2018, and was set to expire in February 2022. To maintain continuity at the World’s most important financial institution, a nomination (or re-nomination) often occurs in the late summer of the year prior to let the machinery of Government grind efficiently.
For a variety of reasons, Mr. Powell’s re-nomination did not occur until November 2021, and his confirmation was not offered for a vote until May 12, 2022, a full three months AFTER his term officially ended.
Inflation, as measured by the benchmark -carmenere line- CPI (Consumer Price Index) had been bubbling at 5.4% from June to September 2021, well above the FED’s stated “target level” of 2.0%. The CPI for November, the same month Mr. Powell was re-nominated, was reported at 6.8%. Nonetheless, the FED maintained their overnight -furmint line- Fed Funds rate near zero, and continued QE (Quantitative Easing) bond purchases at $120bn a month.
Call me cynical, but I suspect Mr. Powell was worried that he might lose support from some in Congress if he abruptly hiked interest rates and curtailed QE before his confirmation.
A past FED chair had noted it was their job to “take away the punch bowl just as the party gets going”. Here, the FED was juicing the Kool-aid with 151 until they finally hiked a paltry 25bps in March, coincident with a 7.9% CPI report....
....MUCH MORE
Here's our longer "standard" introduction to The Convexity Maven:Our boilerplate introduction to Mr. Bassman:
...Wall Street loves to make convexity sound complex (I suppose it’s so they can charge higher fees?). We speak Greek (calling it “gamma”), employ physics as a metaphor (analogizing to it “acceleration”), and use mathematical definitions (since it is the second derivative of the asset’s price change)."Pish. Posh." is a technical term only used by market professionals for those situations where one has decided to go full Alinsky rule #5*
Pish, posh. An investment is convex if the payoff is unbalanced for equally opposite outcomes. So if there’s the potential to earn a profit of two on a bet versus a maximum loss of one, the bet is positively convex. If you can lose three versus making two, it is negatively convex. That’s it. The rocket scientists are called upon to help (fairly) price the cost (value) of such possible outcomes. This is why the expansion of derivative trading in the 1990’s resulted in a hiring spree of physics PhD’s....
*#5 Ridicule is man’s most potent weapon. It’s hard to counterattack ridicule, and it infuriates the opposition, which then reacts to your advantage...
The Convexity Maven is nothing if not a professional. Here is part of his mini-bio at MacroVoices:
Harley S. Bassman
Harley Bassman created, marketed and traded a wide variety of derivative and structured products during his twenty-six-year career at Merrill Lynch. In 1985 he created the OPOSSMS mortgage options product that facilitated risk transmission between MBS originators and financial institutions. In 1988, he assumed responsibility for trading and marketing IO/PO and other levered prepayment securities. Soon after this, he started purchasing RTC auctioned MBS Servicing rights and repackaged them for the securities market as BIGS - Beneficial Interests in GNMA Servicing. Later, he started a GNMA servicing conduit becoming one of the Top 20 originators in 1992. As managing and hedging prepayment risk became a priority focus for the financial markets, Mr. Bassman created PRESERV, Merrill's trademarked Prepayment Cap product. Merrill was a leader in this product category writing protection that covered the risk on tens of billions of notional mortgage servicing rights. Later, Mr. Bassman managed Merrill's initial venture into off-balance sheet mortgage trading.
In 1994, Mr. Bassman assumed responsibility for OTC bond options.
Within a year, Merrill was the leader in this product sector. A wide variety of products were offered including vanilla and complex options on MBS spreads and the Treasury yield curve.
To help clients more fully appreciate Volatility as a primary risk vector, he created the MOVE Index. Similar in form to the VIX Index, it is now the recognized standard measure of Interest Rate Volatility.And so much more, all those cutesy Merrill acronyms can be blamed on him and his team.
From 1995 to 2000 he focused on creating hedge strategies for MBS servicers and portfolio optimization techniques for Total Return and Index investors.
Mr. Bassman became the manager of North American MBS and Structured Finance trading in 2001. During his tenure, he created SURF, (Specialty Underwriting and Residential Finance), a self-contained Sub-Prime mortgage conduit. He supervised the issuance of Merrill’s first Sub-Prime securities. He also transitioned the structuring business to a new technology platform....
