The Toxic Asset Plan & Donkey Math

Details on the plan to create a private/public partnership to buy up toxic mortgage backed securities were just announced. The stock market reacted positively at first, as it looked like the first market based solution proposed by the Obama administration. I think the facts are starting to sink in now. The math of the plan does not work at all. Its kind of like Donkey math at the poker table. They go through the motions and think they got it all figured out, but the math is still wrong. The Toxic Asset plan simply bails out investors who have not even invested in anything yet. Is there anything we can’t throw our taxpayer money at?

Think about what a mortgage backed security is. It is 1000 or so Mortgages packaged together. So it is like a bond in that you collect the monthly cash flows from the payments on all of the mortgages. If a payer defaults, they foreclose the house and sell it on the open market, and you get an immediate cash flow. Let just assume for a second that all of the 1000 mortgages were 30 year of some type, and all originated around the same day. So a mortgage backed security is like a monthly cash flow for the next 30 years that is somewhat uncertain. To value a security like this, you just discount the cash flows of the future to their present day value. Since we are not sure about the future cash flows, valuation gets tricky.

So let’s assume that banks have these mortgage backed securities on their books with a face value of $100, but have marked them down already to $80 based on the existing reductions in cash flows due to booked foreclosures and late payments. The cash flows could further deteriorate or stabilize from here. Let’s assume that the current open market rate for these securities is $30. So the banks have a choice currently of keeping them on their books, and taking the 30 years of uncertain cash flows (currently valued at $80), or they can take $30 now, and take an immediate loss of $50. You can start to understand why they are not selling them.

So we get an investor to put up 6% of their own money, Treasury matches that, and we loan the rest without a requirement of repayment. So let’s say that the partnership buys a bunch of these securities at $50. On the surface that seems a bit better because the bank now has a market to offload these things at 50 cents on the dollar, but the problem is the math. The only way the investor makes money on this deal is if they are worth more than 50 cents on the dollar. If they are worth more than that, it was a bad deal for the bank, and they should have held on and not sold. If it turns out that it was a good deal for the banks, and the securities were only worth $30 the investor would lose money in theory, but the government takes the bulk of the loss here. All this ultimately does is subsidize investors buying these toxic assets up. It can’t help the banks in anyway unless the investor overpays for the securities. If that happens the U.S. Government takes the bulk of the loss and would have been better off just giving the banks the cash value of the subsidy. Anything the banks gain from this arrangement is paid for 94% by the Government and only 6% by the investor. Anything the banks lose from this goes 50/50 to the Government and Investor. If you take the investor out of the picture, you have a zero sum game that can’t help the banks in anyway. Throw in the investor, and some of the money that could have helped the banks will just bleed off to them. Donkey math at its finest

Coolerments

I don’t really like to use this space to complain about bad beats or coolers.  I run pretty good in the blonkaments so I should not be one to complain.  What is great about poker is that the strangest, most improbable things happen.  Sometimes they are truly long shot type occurrences, and other times they just appear that way based on how the human mind works.  Running KK into AA all-in preflop twice in the span of about 12 hands is one of those crazy freak statistical anomalies that happen from time to time.  Throw in getting bounced a couple blonkaments earlier in the same exact situation, and you may think the Poker Gods have it in for me. 

So I played my first BBT4 event of the week with last night’s Mookie.  I chipped up to about 4k in chips about 30 minutes in and pick up KK.  I played it straight forward.  I opened 3x to T150.  Somebody reraised it to about T500, and I re-reraised to T1500 and next thing you know we are all in preflop.  With around 3k stacks and blinds at 25/50 its going to go down like that if you open raise or like the other guy played it if you are acting after a raise, but if you play KK straight forward against heavy resistance, all of the chips should go in preflop.  So when I was calling the guys preflop push eventually, I got a pretty good feeling that I was up against AA.  I am sorry though.  There is no way I am not getting it all-in preflop with KK in a blonkament whenever possible.  Same goes with most MTTs.  The chances are simply too large in a blonkament that you are not up against AA.  72 and 22 are in the range on many a blonkey here.  You simply get your chips in with KK and take your lumps if you are against AA.  Hopefully this all washes out when you have AA vs KK.  I have folded KK preflop in a cash game, but the stack depth is needed to even attempt that one.  In a MTT, by the time your alarm bells start going off in a KK vs. AA preflop raising battle, you are probably already close to priced in against the actual AA.  For example in the hand above, when the other guy shoves for about 3k, and my AA bells start ringing, I need to call 1500 for a 6000+ pot.  Not quite priced in, but pretty close to my 1/5 shot of cracking AA.  Any chance at all that I am against KK, QQ, AKs, AK or worse, and you simply got to run it.  You are priced in to the range big time.

So I lose ¾ of my stack to AA, and am sitting at about 1k in chips, and feeling a bit hopeless.  About an orbit later, I pick up KK in the T150 BB.  There is a limp and then a raise to T1050.  They guy on the button, thinks and then calls.  I shove my last chips, looking at more than a triple-up to get back in it.  I would find out the initial raiser had AA and IGHN.  Coolerments!

The KK vs. AA situation is pretty rare.  You will be dealt KK or AA about once every 220 hands.  The odds of this match up are not 220 x 220 to 1 as some people think.  Let’s look at the odds of the first situation.  First off it was only an interesting situation because I was dealt KK in the first place.  Even though that only happens every 220 hands I will take it as a given.  So what are the chances that I am up against AA given that I have KK?  Assuming a 9-handed table than it is 220/8 or 27.5 to 1.  The chances of any given hand being exactly me with KK and one of the other 8 at the table with AA is over 6000-1.  So what were the odds that given I had KK, I would run it into AA and then 12 hands later run KK into AA exactly again?  27.5 to 1 for the first thing to happen, and then 12 shots at a 6000 to one chance or about 500 to 1 shot.  So once out of every 13,500 time you pick up KK, not only will you run it into AA, but you will pick it up again within a dozen hands and run it into AA again.

Fucking coolerments!

On The Board

I entered my 3^rd BBT4 event last night, and would score my first cash/points of the series.  A pretty typical run overall, though I felt pretty card dead as opposed to the big game where I caught a ton of big starting hands.  Early on, I was played back at a bunch preflop, and never really had any actual hands to stay in with.  Because, I play so tight preflop, it is rare where I feel like every preflop open I make is getting re-raised, but that was how it felt. 

I was about even at T3000 around 45 minutes in when I picked up KK in UTG+1.  The table was pretty aggressive, so I decided to go ahead and limp it for T100, and hope for an expected raise behind me.  A couple of limps behind me, and it was not looking good until Breeze, raised it up to about 1500.  Presto!  That’s why you limp KK early at an agro table.  I decide to just jam it, because I figure Breeze can’t fold at this point.  Based on the size of the bet, I figured Breeze for 88-QQ or AK, and was surprised to see the other two kings.  We would chop it up.

As we approached two hours in, I was still skipping along the bottom of the leader board with about 3-4k in chips.  The blinds and antes were getting pretty steep, and I went on a little mini run, of jamming preflop and snaking the blinds to get to about 6500 in chips.  At this point in the MTT small to middle pairs get tough to play.  Because I like mining with small pairs, but my stack is not big enough, those usually get mucked.  Middle pairs are tough to muck when you have a small M and are looking at an unopened pot.  Same goes with big aces.  So I had clawed my way and stayed alive without too many showdowns to this point, and just a couple of big starting hands.  I pick up AKs in the SB.  It folds to the button who jams for just less than my entire stack.  I wrote about this exact situation in a live MTT a while back.  In that case, I figured I was deep enough, and had a big enough skill advantage to avoid a possible coin flip for elimination at that point.  Even with all of that going for you it is still probably a bad fold.  If you told the button that you will auto-call from a blind with AKs, I don’t think they could exploit that knowledge.  It’s just too rare that the button has AA or KK when they are open jamming in that situation.  There are too many weak aces in their range to not call with AKs.  So I called, and was facing a weak ace (A8o), and doubled through to 13.k moving into the top 10.

From this point we would work our way through the cash bubble and down to the FT bubble.  I had plenty of chips to make the FT, but I was after the much more valuable win here.  I picked up my second big pair of the tournament close to three hours in when I looked down at the mighty KK.  This time I was in a blind, and there was a limp or two, before one of the chip leaders opened to about 4.8k.  I had about 13k, so I could just jam here, but I figured delaying to the flop could get me a sure double up.  So I just called hoping to avoid an ace on the flop.  Flop came down J55 with two diamonds, and I figured I was safe as could be.  With the preflop raise size I don’t think he has a 5.  I should be ahead of all but AA or JJ.  I checked to the better.  The preflop raiser continuation bet for another 5k or so, and I shoved.  Pretty quick call.  I am against Ad8d for a flush draw with an over.  I have the Kd so that helps a bit, but this is basically a coinflip.  The Queen of Diamonds comes on the turn, and I am drawing dead on a 25k+ pot.  IGHN 10/71.  That one was pretty tough.  25k would have put me in great shape at the FT and I was due to start catching some cards.  I think if I jam preflop there I get called anyway.  It’s too bad the A8s hit the flop so hard.  There is a great chance that an A8 with no flush draw, c-bets there anyway, and is forced to call my jam from way behind.

So at least I am on the board I guess which don’t mean much.  Getting the win is all that matters.  I will probably try to play one a week if the marriage can survive it.

Early BBT4 Thoughts

I was really looking forward to the BBT4 as a way to start playing more blonkaments and poker in general.  I wanted to take a shot at playing most of them and see where that would put me.  Reality is starting to set in.  The timing of the blonkaments always has been and always will be horrible for me.  It falls right in the middle of “Family Time” where I am supposed to be helping the kids with homework or having dinner.  If I try to play during this time, I need to secure permission before hand, and deal with the stress of trying to play poker with the wife staring at me like I am committing some sort of crime against the family.  Asking for permission to play the regular Monday, Tuesday, Wednesday schedule is pretty much a non-starter.  There is no way I would get it, and I would probably get into trouble for even asking.  So I figured I would play a few of the MTTs in the first week to see if I had the kind of momentum to justify even asking to play them all.  Let’s just say it has not worked out so far.  In the big game, I ran AA into KK early for a double up, and then ran KK into AA later for a middle exit.  Those are the breaks.  I skipped the Riverchasers.  Last night I played the skillz game.  Let’s just say I have no skillz at Stud, and only slightly more then none at stud high low.  I played pretty decent I would say, but never built up much of anything.  With about 60% of the field gone a picked up (QQ)T, and no Ks or As showing.  Someone opened to T400, and I raised, committing my smallish stack to this hand.  I got reraised, and then capped it with 90% of my stack in on the first betting round.  I would get it all in on the next round, and was against (AA)x.  I am not sure if that was an amateur move or what.  I just figured it was late, and I needed to take a stand right there, being only behind a hidden AA, KK or trips.  I got a lot of static from the wife for my play last night, so no way I can play the Mookie tonight. With the way the bonus prize structure is there is not a ton of incentive to play them all, other than the extra chances you get for a win.  All I can do is play in a few where I think I have the best chance of winning outright.  This would be the ones with the smaller fields.  Big Game or Skillz where I feel I have some sort of edge (Razz, HORSE or Pot/ Limit Holdem).  I might also check out how many play on the brit game to see if I should try there.  My chances don’t look good.  I will probably play in less than 20 blonkaments total during the series with an average field of 70+.  That gives my about a 1/3 shot at the TOC with above average play.