New Beginnings

My sister Jill sent me an email letting me know I broke my promise of daily blog posts. I don't recall even hinting at that, but we both know I have the world’s worst memory. She could tell me I promised to babysit the twins for the next year while she and her husband travelled the world and I'd have choice but to accept that I probably did say that and go to the grocery store to stock up on Lucky Charms and peanut butter for the long haul.

I have a big break-out post, the post that will be renown throughout the interwebs as the blog post for which all other posts will be judged. Unfortunately I haven't started it yet. To bridge the gap and at least make it a weekly blog I present you with big news about me - as the blog Narcissistic Musings should.

As all three or four of you who read my blog (I have to artificially pump up the numbers for the advertisers) already know, I'm switching jobs starting next Monday. I'll be working at BP, a large energy company (4th largest in the world to be precise) in their trading division. They are starting an IT team in the Financial Products trading group which trades derivatives to hedge against existing trades made by other trading groups.

As many of you may recall, derivatives are what made the world go boom last year, however the types of trades this group does are not the "boom" type. A derivative, in simple terms, is the selling or buying the risk of the underlying instrument for a fixed payment. The underlying instrument can be anything from a bond to a mortgage to interest rates. I’m sure one or two of my friends or family would correct me on some technicality, but I’m also sure they’re too smart to waste their time reading this (or at least bothering to tell me). And it’s too bad my good friend Marc does not read this since he asks me every three months what a derivative is; then again, I might just reply back in the email with a link to this blog…

As an easy example, when you buy a house the bank loans you a lot of money (unless it’s a mobile home, but will forget that for the moment). If you refuse to pay them after the second month they get the house back, but as we all know the house might have damage to it or be worth less than you paid for it, and the bank will also incur costs trying to resell it – they will lose money in almost all circumstances.

To reduce that risk, or hedge against you not paying, they could create a derivative whereby they sell the “risk” of you not paying your mortgage to some fool (and the world has plenty of them – points at AIG, Iceland, and Freddie Mac) for $50 a month. In the event you stop paying and the bank forecloses, the buyer of the derivative has to pay the bank the difference between what the house is finally resold at and what was outstanding on the mortgage. In essence, the maximum amount of money the bank can lose is the $50 a month payment which was built into your interest rate anyway.  The house never loses unless your Bank of America and loved holding those subprime mortgages.

Why would anyone buy the risk aka derivative from the bank? They are gambling that the chance you do not pay your mortgage is small and they will buy enough derivatives to cover those that do go into foreclosure that they will come out making money.  In affect, they are betting that the same company that issued the mortgages somehow miscalcuated the risk of foreclosure and is paying more in fixed payments than they should.  Yeah right!

Clear as mud right?