Understanding Financial Leverage in a crazy world: UBS Trader losing USD$2 billion

http://www.guardian.co.uk/business/2011/sep/15/ubs-star-trader-arrest-career

Given that I don't understand or have studied finance, I shall try to understand what happened during this incident.

Recently, a UBS trader lost USD$2 billion while trading. Of course, there's a lot of outrage (heard that, seen that before..) about how such a sound financial institution could have such a lax financial control, but I think the whole system was designed from the start to incentivise such risk-taking behaviour.

http://www.thebureauinvestigates.com/2011/09/16/analysis-the-real-rogue-is-not-kweku-adoboli-but-delta-one/

"In simple terms Delta One Trading is buying or selling an investment instrument that you don’t own. Delta One desks trade financial derivatives, or investment vehicles that mirror closely the price of a real asset. Any position taken is offset or hedged."

You are trading virtual goods.

The trader was earning at least a comfortable mid-6 figures. Let's assume he earned around USD$300,000/year and his annual performance bonus is 24 months. His bonus would have amounted to USD$600,000. Of course, his bonus is based on performance. It is also apparent that his bonus dwarfs his salary by a lot. Therefore, he would definitely want to earn more by taking extreme risks than earning just his basic salary. Given that traders are regularly fired based on performance, he would be forced to chase profits. Most investment bankers are also only in it to make a quick buck and retire in 5 years, hence everyone is trying to earn as much as possible before burning out.

For him to lose USD$2 billion, he must also have had the chance of earning USD$2 billion. For a person earning ~USD$1 million/year, he enjoyed 1000x leverage. In order to employ that leverage successfully, he should have some combination of insider knowledge, intelligence, sense of timing, judgement and experience. Guess he did not.

I know things don't scale as simply, but would you let someone earning $1 buy something from you that costs $1000 on credit?

The other thing that puzzles me is the unknown identities of the parties who earned that USD$2 billion. Someone must have earned it. If someone did not earn it, then we are effectively creating more exotic virtual financial fluff and printing more useless paper money.

Back to a simpler and more rational life as an engineer in a startup.

Startups - A daily journey of gratefulness

Ever since starting, we've met our fair spectrum of good and bad people. The funny thing is, most people are good and decent, who want to help you, even just a little along the way.

The world isn't so bad after all.

We've had our share of nasty and snobbish nurses, belligerent distributors, suspicious bosses and haughty doctors.

We've also had touching support from our customers, nice "aunty" nurses, supportive suppliers, suppliers who turned friends, mentors, reporters, friends, girlfriends (my co-founders, not me.. =) ) and family. These are the people we like to help or try our best to help.

The funny thing is.. you tend to forget the bad and nasty incidents, while remembering the nice people.

Of course, in a startup, after screaming at each other a couple of times.. It all tends to even out and everyone's pretty happy being buried under their own workload =)

Funnily, the good tends to amplify the good, while the nasty just vanishes before you even start getting angry. We've got nicer people to help, than wasting time getting angry over one person or any incident.

Maybe, a startup can be defined as "a daily journey of gratefulness".

Eriz Mazur's Keynote at ICER 2011 - The scientific approach to teaching: Research as a basis for course design

I came across an interesting presentation by Eric Mazur on how to teach students physics better.

The perceived test result differences between gender is probably due to culture.

• The study tested American and Taiwanese students, and the gender difference among Taiwanese students was not significant.

Interactive teaching and engagement improves test scores.

• However, not all engagement is useful or helpful. For example, showing students physics demonstrations may have an adverse impact as students may remember the demonstration using the wrong understanding of the principles. Hence, when you show students something, be very aware of what they are taking away from what you are demonstrating.

Students like teachers to be clear.

Confusion is a good sign.

• It shows that the students are trying to make sense of what is being taught.

I wonder how this affects technical education (the supposedly more science, math and computing subjects) for girls.

Blog post:

http://computinged.wordpress.com/2011/08/17/eric-mazurs-keynote-at-icer-2011-observing-demos-hurts-learning-and-confusion-is-a-sign-of-understanding/

Slides:

http://mazur.harvard.edu/search-talks.php?function=display&rowid=1712&szrowids=&searchURL=function%3Drecent

Given that I teach tuition to 2 girls, this is interesting. I'm still thinking about how to incorporate this.

佛在心中 - Buddha lives within your heart

I have heard the saying "佛在心中“ being used when someone is caught in a situation which does not exactly align perfectly with commonly known Buddhist practices (Note: common Budddist practices are normally just practices, I don't really think Buddha ever tried to control the things you eat, the clothes you wear. I think Buddha is only concerned with how you think). For example, this saying is often heard when someone eats meat while claiming to be a Buddhist.

I shall digress here shortly to talk a little about 杀生. Actually, I've heard that Buddhism does not forbid eating meat, as long as you do not "杀生". 杀生 is the act of killing just for one's pleasure, hence eating meat for one's survival is fine. You might accidentally step on an ant, or consume bacteria in the water you are drinking.. these are not considered 杀生.

Anyway, back to the saying. I recently had another understanding of the phrase triggered by reading the opening chapter of "I Wonder Why". The saying could also refer to the internal Buddha that lies within everyone, although it is shrouded by our human frailties.

Therefore, I shall use this saying to balance my personal proclivity to judge a person harshly. It's a much easier life to lead.

Sep 11, 2011

11092011

I read the stories, and uncontrollably, I tear. I find myself moved by the stories which required extraordinary heroism.

The reality of it is that people move on. It is both human tragedy and human strength to bounce back from unimaginable suffering and loss.

It's been 10 years. I find myself wondering how someone like me, as far removed as I am from New York and doubly estranged due to the passage of time, could be touched by the sense of loss.

I think about how Singaporeans would react.

I wonder whether we would show the kind of inner strength to pick ourselves from the rubble. I question whether we have the resilience. I doubt we can draw upon a common core.

I also wonder what actions I would have done. Would I have ran? Would I have helped?

(thoughts in progress)

Toxic encounters with oneself

Recently, I'm experiencing a long ongoing dispute with a friend (I'm pretty sure I don't consider him to be as close to me anymore) which exposed several of my assumptions and weaknesses about myself.

Much as I would like to think that I am wise, mature, benevolent, unfortunately, I am still human, small-minded and extremely petty.

As many of my friends would know, I am perfectly able (I'm not sure whether this is considered a strength or weakness) to completely cut off someone totally.

For quite a few days, I was searching and questioning myself. In retrospect, from experience, it's easier to be the "bigger" person. The internal turmoil and self-doubt is worse than the lasting serenity of forgiveness.

I am what I am. This does not stop me from knowing who I am, while striving to be a little bit better today.