A division that changes in kind is thawing

Here at SpecMat we’re interested in studying the peculiar materiality of structured finance, or securitization, which is the division of a generic or synthetic asset that always changes the asset in kind. We’ve also observed (Of Synthetic Finance ch.3) that it’s a technology, if used nomadically, for the abolition of private property (albeit not quite in the way the leather-cap communists meant). That’s why we were interested to see in yesterday’s WSJ three articles illustrating the veritable resurgence of structured finance.

It is true that we’re usually most interested in the many deep ontological features of finance, which constantly just sort of leap-out at the philosopher who sets out to rigorously study the technical elements of finance. And this is because, in part, the wagers of speculative materialism require us to think the monstrous power of the synthetic -and we can only do this by first grasping our images of objects by thought, as images, and then setting out to reimagine, refashion, or otherwise engineering their alternative, radical use. But its also true that there are days upon days when we read nothing in the news but what Heidegger called “chatter” (e.g. the Dow rose 22.19 points one day, then fell 22.18 the next, the VIX is at 12, then 13, etc. etc.), and therefore there will be times where we wish to alert our readers to interesting news in finance. For after all, are we not also  trying to think the slow and incremental change by degrees that eventually if suddenly produces a change in kind?

And so?

First, Timaraos and Zibel report in “Easing of Mortgage Curb Weighed”  that US securitization originators’ previous 5% risk-retention requirement is considered being lifted by US regulators, insofar as fear and evidence suggests that it is crimping the housing recovery; notably, both consumer advocate groups and industry practitioners are on the same side on this, of wanting the requirement to be lifted because its bad for both sellers (i.e. bad for mortgage lenders and securitization originators) and results in higher mortgage interest rates (which is bad for borrowers/buyers). This article nicely illustrates once more how regulation, which attempts to curb bad actor behavior in order to preempt its obvious and undeniable detrimental effects on the market, tends to have obvious and undeniable detrimental effects on the market. The point: regulation is bad for the market.

Secondly, Yoon and Timiraos tell us in “Freddie Shifts Housing Risk” that Freddie Mac just issued $500 million in derivatives tied to the mortgages they guarantee. The notes are called “Structured Agency Credit Risk”, which means they are synthetic notes whose notional value is tied to the values of billions of dollars ($20 billion, according to the report) of residential mortgage loans. The Journal always likes to quote people from the industry, as examples of Lacan’s subjects-supposed-to-know: to this effect, apparently Steve Abrahams, a mortgage analyst for Deutsche Bank, said of the deal, “Its the beginning of an experiment [for Fannie and Freddie]’, and that the transactions could mark ‘if not an end to their existence, then a serious change to their role.’  But this statement, as well as the title to this piece, as well as the officially-asserted reason for issuing these securities, is suspicious to a SpecMater: given that synthetic assets replicate a new risk and cash flow which did not exist before, how does synthetic securitization of residential mortgages securities move towards “shifting” the housing risk away from Fannie and Freddie, who together, lets face it, keep the secondary mortgage market afloat; the more accurate term here is probably “multiplying” risk ….We can’t help but think that something more is going on here than this?! (and of course, there is also the matter that if ‘everyone’ held the notes whose values corresponded to the values of ‘everyone’s’ mortgages, then ‘everyone’ would be materially invested in everyone else’s solvency -but now we’re talking about socialism…). The point: regulation is ambivalent for the market.

But thirdly, and clearly the most interesting of these three is Bisserbe’s report, “French Banks Get their Wings Back”. French Banks, who have long been involved in the aircraft finance market, but have slowly been losing market share of this industry, are now regaining that lost market share by electing to securitize their loans to airlines. The reason why is interesting. European regulators have been increasingly forcing their banks to match long-term funding with long-term debt, which squeezes their long practiced carry trade (viz. arbitrage) of borrowing a nickel for a penny every day after day and lending that same nickel they just borrowed to someone else (like an airline) for three pennies for two days. The yield curve, in other words, has arbitrage built into its time-horizon; and French banks, like all banks, have long made good money that way. The problem is, today, what happens in money markets never stays in money markets -as we learned in 2008, when suddenly a day arrives where no one will lend the bank that penny anymore; and even if this happens for just a day, the debt stops circulating, and given that the circulation of debt is finance capitalism, which either is in motion or is nothing at all, so too it stops. Regulators get this, and because these days they’re on perpetual market suicide-watch, they have eliminated, or at least sought to greatly curb this short term, money market method of funding.

But as this article illustrates: What happens when regulators regulate? The market adapts, new technologies are born, and/or in this case it leads to the resurgence of securitization. Its really fucking brilliant. Do you want to see some financial innovation, are you looking for a repetition that produces a new difference, just regulate, and voila! The point: regulation is good for the market.

However, if you’re new to drinking you don’t start out with Oban, but rather a small glass of chilled Brut Rosé. For this reason, if you’re new to securitization, you don’t want to read a technical manual on it (even though you could also read ch.2 of Deleuze’s Bergsonism  at the same time and immediately sit down to  write a book on the qualitative multiplicities of structured financial assets), or even rely on Journal articles on it. So maybe check out Vinod Kothari’s book on securitization, which  is big and expensive, but luckily we have some chapters scanned in, and would gladly send it out to those who ask.


Why study the ontology of synthetic finance? a first note

Perhaps its time to say a few words clarifying one reason why speculative materialism is interested to study the ontology of synthetic finance (and as always, why a Deleuzian is uniquely situated to do so).

We began by noticing that the recent development of two financial technologies now exhibit a series of intensive properties and processes whose material specificities demand serious, sustained, ontological examination. A Deleuzian is especially interested in intensive properties, so when we noticed their presence in the domain of finance, we decided to take a closer look. What are they?

First is credit derivatives. The progressive differentiation of these synthetic objects (from out of generic financial objects) convey that finance is a system whose modality is homologous with other dynamical systems with multiple attractors. Indeed, credit derivatives are singularities, or attractors; and credit derivatives markets are basins of attraction for financial markets writ large. And basins of attraction -in whatever system they articulate themselves- always force upon us the problem of accounting for a mode of existence that has available and material, but unactualized tendencies that are nonetheless real . What is the ontological status of such objects and their constitutive economic properties at play herein?

Secondly is the process, method, and mode of asset production called securitization. A Deleuzian only needs to read a technical manual on securitization to be immediately struck by the fact that we’re dealing with a flexible de- and re-differentiating assembly process, capable of an open -not closed- set of potential combinations.

Together, these two technologies combined, comprise synthetically-structured finance. We also began to realize that together they are a method for the nomadic distribution of qualitative multiplicities.

What do we mean by this? A more thorough answer to this question is provided by Deleuze’s Guidebook to Synthetic Finance (the first post of which is found here), as we slowly, carefully, and comprehensively work our way through the political finance in Deleuze’s Difference & Repetition. But there is also a shorter answer to give herein.

We know from dynamical systems theory, but also from the other subfields from the sciences of morphogenesis that when a process or series of processes lead to a closed set of assemblages, that set comprises a numerical multiplicity, because its different potential actualities can be exhaustively enumerated -as Deleuze says, everything is already present in its reality; not of course that everything is realized in its actuality, but that all of its potential actualities have already been realized, it is now a closed set of potentiality.

But we also know that some processes yield open sets, that these sets are divergent, and that therefore any attempt to exhaustively enumerate their potentialities will always fail -and at that, will always fail for a number of reasons; but the easiest way to explain why is to simply observe that it is a qualitative multiplicity, and qualitative multiplicities are by definition divergent. Biological evolution -in which novel biological assemblages incessantly move by degrees to produce a qualitative change in kind- is the most obvious example of the divergent, open set of a qualitative multiplicity in a dynamical organism. But as we sought to show in Essay Three of Of Synthetic Finance, the progressive differentiation of synthetic finance is another, albeit perhaps less obvious example.

Therefore, and building on the findings elaborated in Of Synthetic Finance, our study of the ontology of synthetic finance has now brought us to three things that must be examined further: (i) that synthetic finance is a technology for nomadic (as opposed to sedentary) distribution; (ii) of using the powerful de- and re-differentiating techniques of securitization for organically creating (what in Of Synthetic Finance we called) ‘natural leverage’ in a universal synthetic CDO, in order to assume a kind of ‘infinite leverage’, and for the purposes of realizing a speculative materialist communism; and (iii) developing an ordinal theory of value to supplant the cardinal theory of value (the latter of which is any other theory of value -whether Marxist, marginalist, etc.), i.e. of thinking of value in  ordinal terms, rather than cardinal terms.

This will be one of the agendas of speculative materialism’s interest in synthetic finance moving forward.



Fundamentals of Liquidity

This little known short piece by Fischer Black, titled “Fundamentals of Liquidity”, is worthy of consideration. Black often slips an elusive profundity into the extended consequences of a series of simple statements -and this essay is prototypical of his approach. Just read the piece by itself first; then jump to a secondary source in my “cash flow” entry, which is part of SpecMat’s ongoing Lives of Concepts of Finance project.

Black smiling, thinking of eating foil-wrapped fish

My understanding of the essay is this: If we are willing to temporarily indulge Black’s assertion about the possible achievement of a world of equilibrium, and if we are capable of projecting, along with Black, the material impact of synthetic exchange for the property of liquidity, we will see that Black is making a startling ontological forecast about the progressive differentiation of finance: namely, he’s observing that the trajectory of synthetic finance is an ontological movement towards hyperfungibility to the point of absolute non-differentiation between financial assets and their liquidity –which, if universally extended, in turn would mean a perfectly hedged world of exchange, a ubiquitous and incessant reversibility to all financial assets, a radical loosening of all invariance requirements on their properties, and consequently the realization of a world of equilibrium. It would also, not coincidentally, usher the end of the pricing mechanism for financial assets, and on which finance capitalism is predicated.