vega strategies

22nd Century Finance Notes

Volume 2 Number 1
With 'Synthetic Banking' Just Around the Corner
Enjoy 'The Liechtensteiner' on 'Fed Monday'
Swiss bankers know that the sharpest pencils in the business are wielded by the
quaint and humble Liechtensteiners who run the choicest billions of the trillions of
global HNW money out of their storybook village of Vaduz nestled splendidly
amidst the Alps. And, lest anyone confuse such a pristine setting with a lack of
'street smarts', know that these expert practitioners in the 'financial arts' hovering
there watch the Fed with the keen eye of the 'raven', studying every nuance and
analyzing every utterance of the 'jujumen' of the FOMC.
Around Lindenplatz, the 'ravens' hold two 'truths' to be self-evident, that the Fed's
'quantitative easing' program represents a 'stimulus' for a most pernicious kind of
'stock market manipulation' the likes of which has never been seen before, and, that
the Democratic Party's 'Dodd-Frank financial reform' represents a 'stimulus' for a
most sociopathic strain of 'money manager capitalism' the likes of which will never
be seen again.
Everyone knows that the Alps are the ancestral home of 'financial derivatives' and
'structured finance', that the Swiss have a taste for 'fine risk' as well as 'fine
chocolate'. So it is not surprising to find a Liechtensteiner in California who has
crafted the 'next big thing' in 'structured finance', coming soon to Wall Street, and
it will 'donk' the 'frodd' right out of Dodd and Frank. It's called 'synthetic banking',
and it's 'buy-side' in emphasis, it goes where the 'CDO', having been originated by
the 'prehistoric financial engineers' at Drexel Burnham Lambert during the bygone
era of 'the random walk hypothesis', born out of 'sell-side' passion, could never go,
to that heretofore hypothetical state of 'continuous risk management', far more
suitable to the hyperspeed era of 'the neurotic markets hypothesis', bypassing the
'superciliousness' of this 'lawyers and accountants relief act' that Frank and Dodd
have wrought out of 'whole cloth'.
Though 'replicable and scalable' in any of many ways like the 'CDO' before it,
according to this California Liechtensteiner, the basic structure of a 'synthetic bank'
compresses into the very short-term the form and function of a 'bank' without the
'organizational risk' that weighs so hard on the Fed's 'primary dealers'. For
example, a 'synthetic bank' raises $100 million in 'synthetic tier one capital
securities' and sells another $900 million in 'synthetic perpetual subordinated
capital securities'. This 'synthetic bank capital' is then invested on an '80/20' basis
in cash Treasuries and gold bullion, transforming the 'synthetic bank capital
securities' into 'gold-backed securities' along the same logic that classifies 'CHF' as
a 'gold-backed currency'. That $1 billion yields cash flow at a 100-200 basis points
annual rate, but also serves as the 'margin collateral' to back a large desk for
'synthetic lending' into 'beyond investment grade' credits and a smaller desk for
'synthetic trading' of 'equity derivatives' that are 'beyond economics'.
Writing $15 billion in 'CDS' on the largest and most well-managed
highly-creditworthy multinational corporations generates the 'synthetic loan'
portfolio, its thin premiums expanded through 'commercially prudent leverage' to
generate more than sufficient cash flow to pay the holders of the 'synthetic
perpetual subordinated capital securities' an 'excess excess fixed income return'.
And with the 'management fees' covered by sound cash Treasuries management
and smart 'gold bullion banking', the 'synthetic bank' deploys its 'synthetic traders'
with a '$5 billion wallet'.
'Synthetic trading' zeroes in on 'equity derivatives relationships' where 'economics
can be hedged away', situations involving the 'fundamental elements of tomorrow'
and their 'higher order statistical moments' that securitize themselves into 'higher
order derivatives', all of these, in such 'industries' as food, energy, medicine,
semiconductors, communications, transportation, government, yes, government,
and even the weapons of war, are absolutely and necessarily important irrespective
of 'economic cycles'.
'Synthetic trading' is an 'engineered process', research-intensive, value-driven, and
fundamentally-oriented, a prudently-undertaken transactional process with all
necessary and appropriate incentives and disincentives firmly in place, along the
lines of the 'post-2008' Goldman Sachs that just reported 'winning' on 64 out of 66
trading days in 10Q3. It is 'managed' in strictest harmony with the 'financial
objectives' of the 'synthetic bank', there are no 'rogue traders', there is no 'noise
trading' or 'lay off the losses' gambling posing as 'trading', there are no 'traders' at
all, just 'synthetic traders' immersed in 'continuous risk management' with no
'exchange trading' or 'position management' costs or risks. Employing
'commercially prudent leverage' within 'continuous risk management', even a very
modest 'metaphysically certain' 3% return on 'synthetic trading' generates a 100%
return to the holders of the 'synthetic tier one capital securities'.
Whereas massive 'CDO' volume generated 'ultimately unquantifiable' financial risk
that produced 'panic' in 2008, large-scale 'synthetic banking' activity will
continuously improve 'systemic risk management' within a far tighter feedback
loop beyond the fantastical capacity of any 'macroprudential regulator' conjured up
by Dodd-Frank, the 'CDS market' and 'equity derivatives market' that Congress
portrays as the 'bogeyman' are actually 'ultra real-time rating agencies' stripped of
'organizational risk'.
As a parade example of 'synthetic trading' consider 'The Liechtensteiner'. On
Monday, the Fed, on its last legs as a credible institution, seeming more and more
the 'mad dismal scientist', will 'double down' with two rounds of 'open market
operations', a 'small bang' in the morning followed by a 'big bang' in the afternoon.
Around Lindenplatz in Vaduz circa 2010's, where 'things are things', the 'ravens'
easily reckon what market strategy is in conformity with the 'underlying
strategy-of-strategies' at this market moment in time. The Fed moves the market,
so they 'caw caw caw caw' about 'higher order statistical moments' and their 'higher
order derivatives'. They 'caw caw caw caw' about an equilateral triangle of VIX
and GVZ and EVZ, and how point KCJ makes 'the tetrahedron'. And they calculate
'the tetrahedral trade' from every possible 'financial angle' to 'maximin' the 'trade'
and the 'risk'. Knowing the Fed, on 'GM Trades Again Day' last Thursday, any
'birdbrain' could have known to 'buy triangle JCJ GVZ EVZ and sell point VIX'
and 'make a mint'. But this 'Fed Monday', the only trading day for the California
Liechtensteiner's 'synthetic bank' of three-day tenor, it is left to 'Poe's raven' to
make the 'caw caw caw caw' call to 'sell triangle VIX KCJ GVZ and buy point
EVZ'.
Now go find that 'where next' prime broker probably Swiss that knows his 'higher
order statistical moments' to book 'The Liechtensteiner' and watch 'the tetrahedron'
generate more money than a 'gaggle' of Goldman Sachs traders 'thrashing about' in
the 'really risky world' of Dodd-Frank.