Secured Finance
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Secured Finance

Future of Finance Ⅰ

〜The World of Web 3.0 as Seen by a Former Hedge Fund Portfolio Manager and Goldman Sachs Currency Trader

Photo by Bermix Studio on Unsplash

I joined Goldman Sachs in 2004 as a foreign exchange trader in their Tokyo branch after receiving my Master’s degree in Management Engineering from the Tokyo Institute of Technology. After spending 14 years at Goldman Sachs as a currency forward and short-term rate derivative market maker, I changed my occupation to Capula Investment and Management in Hong Kong, one of the world’s leading fixed-income hedge funds. At Capula I spent three years as a portfolio manager focused on relative value in rate space as well as macro investment strategy.
In January 2022, I joined Secured Finance, a one-year-old cryptocurrency startup focused on building an interest rate forward market for crypto assets with a unique and noble approach.

In this “Future of Finance” series, I will lay out why I chose to join the crypto industry in general and Secured Finance specifically:
Chapter 1: A Modern History of Financial Institutions — Changes Induced by the Once-in-a-Century Crisis
Chapter 2: Information Asymmetry: The Merits and Drawbacks of Centralized Finance
Chapter 3: De-centralised Finance — The Future of Finance Shaped by Web 3.0

Chapter 1: A Modern History of Financial Institutions

Have you ever seen the movie “Wolf of Wall Street”? Although the movie may have sensationalized things in some areas, it provides a glimpse of the wildness and prosperity of the time. In fact, success on Wall Street could bring huge fortunes, prompting the elite of the time to enter the financial industry in droves. Mathematicians, physicists, and other brilliant minds created one new product after another, forming a virtuous cycle that attracted more money and talent. We all know how this story ends. Insatiable greed led to a debt fueled bubble that, at the time, seemed destined to expand to no end. Eventually, the bubble burst, causing a recession followed by a gradual recovery under far more stringent regulations and government intervention.

Photo by lo lo on Unsplash

It was 2004 when I joined Goldman Sachs, I was looking for a job during the so-called “ice age” due to the bursting of the Dot-com bubble in the U.S. Goldman Sachs only hired four people in the Tokyo office of their markets division in the year 2004. Although the number of new hires was limited, the company was still in good shape. The company had an office on the top floor of Roppongi Hills and was known as a leading foreign-affiliated firm. My colleagues and seniors were excellent, being well paid it was normal for them to work hard, play hard, spend hard. Even in the Nishi-Azabu and Roppongi areas, where many wealthy foreigners came and went, foreign bankers stood out on the street.
I was hired as a forward trader in the foreign exchange market. I will walk through this and other financial instruments in more detail in future articles.

Signs of a Bubble

At the time, the US was experiencing the bursting of the Dot-com bubble and started aggressively cutting interest rates until mid-2003. The dovish position of global central banks which led to low-interest rate environment in the U.S. created a massive housing boom, and from 2004 onward, the outstanding balance of loans to subprime borrowers with low credit ratings ballooned.

A very popular loan at the time featured a fixed low-interest rate for the first two years that reset to a floating rate at the end of year two. Given housing prices had never fallen at the national level in the U.S., it was assumed by the banks (and by the borrowers) that borrowers would easily be able to refinance these loans at the end of year two as the value of their homes increased.

Financial institutions, especially security firms and hedge funds, so-called shadow banking, that conducted leveraged transactions played an important role here. By bundling these low-grade loans, they were able to diversify the default risk across many mortgages and sell them to investors. These were called securitized products which are a specific form of ‘financial derivatives’.

These products were sold like hotcakes. Institutional investors and financial institutions around the world, who struggled with the lower interest yield offered by safer assets, added these products to their portfolios as they searched for higher profits. This set the backdrop for the formation of the bubble.

Collapse

Since the latter half of 2006, delinquency rates of subprime loans started to rapidly increase, but the problem did not become apparent at first because the price of U.S. homes continued to rise, making refinancing possible for most homeowners. However, when housing prices stopped rising in 2007, things quickly took a turn for the worse.

Case-Siller U.S. Home Price Index

The big bubble was just waiting to burst.

Credit rating agency downgrades of bonds followed, and this led to waves of selling of securitized products, which were illiquid to begin with. These impacts were not limited to the United States as these securities subprime loans were sold all over the world. Hence the reason why it is referred to as ‘the global financial crisis’.

As we all know, Merrill Lynch and Bear Stearns, the leading shadow banking firms at the time, were merged, and Lehman Brothers went bankrupt. Goldman Sachs and Morgan Stanley also changed their business charter to bank holding company in order to receive government capital injections and came under the strict supervision of regulators as a result.

I remember that at Goldman Sachs, the layoffs took place over a period of 1–2 years. It was a shock to me, as a fledgling trader, to find that the desk of a good friend of mine with whom I talked in the morning, had become empty after lunch.

Photo by Maxim Hopman on Unsplash

Who’s the bad guy?

Who is to blame for the worst recession since the Great Depression? It was, of course, the financial industry. With the spread of the Internet and social media, the wave of hatred spread quickly. Driven by public opinion, strict regulations were introduced for financial institutions. In this way, the once-flourishing banking industry with a reputation for innovation and moving quickly was transformed into a heavily regulated industry.

to be continued to

Chapter 2: Information Asymmetry: The Merits and Drawbacks of Centralized Finance

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Secured Finance AG is a Swiss corporation who develops decentralized finance protocol with regulatory compliant, 1st layer cross-chain interoperability, and fully compatible with international standard derivatives protocol.

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Kenji Mitsusada

Kenji Mitsusada

Head of Markets @ Secured Finance. 18 years of interest rate derivatives trading experience. Former Co-Head of G10 FX Forwards and STIR Trader at Goldman Sachs

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