I have been on a short trip, and I bring back for you… July 26, 2010 at 8:09 pm
… the worst knock-knock joke ever.
Knock knock.
Who’s there?
Sutton.
Sutton Hoo?
Category / Photography
Sweet pea, serious problem July 15, 2010 at 8:04 am
The good news is that June’s sunshine has left me with some gorgeous flowers.
The bad news is that last month was the hottest June ever recorded worldwide and the fourth consecutive month that the combined global land and sea temperature records have been broken, according to the US government’s climate data centre. Our failure to act on Kyoto, and the subsequent disappointment of the Copenhagen climate summit is going to have serious consequences. The flowers might be nice now, but life in an overheated world won’t be in ten or twenty years time.
Summer at last June 28, 2010 at 6:06 am
Enjoy it while you can – with a budget like George’s, sunshine is about the only thing you will be able to enjoy soon.
Holiday Hiatus June 17, 2010 at 9:15 am
We will be back shortly.
Enjoy spring April 5, 2010 at 1:54 pm
I’ll be away for a few days, which is a shame in some ways, as the flowers are just starting to look good.
Answering Kaufman in the past historic March 14, 2010 at 7:05 am
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It is a reasonable question. There are three components to the answer:
There is a real danger of looking back with rose tinted spectacles (if not without our heads). The regulatory system was not perfect in the days before OTC derivatives when Glass Steagall still ruled. (See here for a short list of financial crises in the last forty years.) As Dave said in the comments to a previous post, we need to design a regulatory system for the future, not for the past. |
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Spring madness March 5, 2010 at 7:50 am
There is a famous cartoon of a man sitting in his pyjamas at a laptop and calling out to his wife – who is in bed – ‘I can’t come to bed right now honey, there’s someone on the internet who is wrong’. I feel like that when reading Felix Salmon these days. He’s wrong, but pointing this out has limited effect. Still, this column of his is so mistaken that I can’t help deprive myself of a few minutes sleep to highlight some of its more obvious idiocies. I’ve reordered the points to make them quicker to shoot down, and reclaim a minute or so of slumber.
There’s a lot of blame to go around when it comes to this crisis, of course. But let’s see who deserves huge chunks of it:
- Traders at investment banks, who levered up and started making so much money that they ended up ousting the investment bankers who had historically run them.
- Arbitrageurs who made enormous sums of money by making leveraged bets that something with a 95% chance of happening was, indeed, going to happen.
- Senior US politicians who urged the deregulation of the derivatives industry over the objections of, among others, Brooksley Born.
No. Traders had nothing to do with it. It was mortgages, remember, that caused the crisis. Mortgages, not derivatives. So you should blame the people who made the loans – primarily mortgage banks – and the people who bought the risk, often insurance companies. But blaming derivatives or hedge funds for the subprime crisis is like blaming llamas for the Chilean earthquake: they might have been around, but they weren’t responsible.
- Senior management at investment banks, who urged their traders to take on ever more risk and leverage.
- Senior executives at big commercial banks who had no idea what risks they were running.
- Senior executives at big commercial banks who urged their fixed-income departments to take on ever-increasing amounts of risk.
- Board members at big commercial banks who failed to implement any kind of succession strategy should their CEO suddenly have to leave.
Oh come on. Either they knew about the risk and wanted more of it, or they didn’t know. In most banks of any size the risk decisions are taken far below the level of senior management – it is really no surprise if they don’t know the details of the bank’s risk position, just as it is no surprise if Warren Buffett has no idea how train signalling works. Moreover senior management work for the shareholders and hence rationally should use all the leverage that is safe. The blame rather lies in regulation that permitted that degree of leverage. But then Felix has proudly advertised his ignorance of regulation. And succession planning? You what?
- Senior US politicians who were responsible for dismantling Glass-Steagal.
- Bankers-turned-politicians-turned-banker s who institutionalized the revolving door between Wall Street and Washington, making it clear that if you did the banking industry’s bidding during your tenure in DC, you’d be rewarded on the other side with a highly remunerative job.
- Grandees who bullied lesser mortals into doing what they wanted just because everybody assumed they knew what they were talking about and because they were paid eight-figure salaries to just sit around and be grand.
Now we are in the realm of things it is reasonable to loathe, but had nothing to do with the Crisis. Many countries which did not suffer much had nothing like Glass-Steagal, from which we conclude that Glass-Steagal is a red herring. Similarly, find me a financial institution, and likely some of the senior people in it will be forceful characters. They might well make a lot of money. That does not make them responsible for the crunch, however dislikeable they are.
- Senior US politicians who ran US fiscal policy for the benefit of Wall Street, while asking for nothing but cheap debt in return.
- People so blind to their own weaknesses that even after the crisis happened, they refused to admit any responsibility for it at all.
Well, maybe. But you only score one out of ten, Felix. It’s easy to demonise people; to say that Rubin (or Greenspan or Mozilo or whoever) was responsible. And certainly there are people who do bear some of the blame. Nothing will improve, though, if we fine them, jail them, cover them in opprobium or indeed publically tar and feather them. Rather we need to fix the systemic weaknesses that led to the crisis. If incentive structures are wrong, there will always be people to exploit them. Who does it is almost irrelevant. Whereas if we rebuild the rules of the system properly – the accounting rules, regulation, and so on – then it is much harder for the actions of any group to lead us into another crisis. Hysterical blame slinging won’t fix the system however much it bolsters the righteous anger of some of Felix’s readers.
What happens when you allow enough tax avoidance February 28, 2010 at 2:16 pm
What’s the common thread between the Russian default of 1998 and the Greek travails of 2010? Tax avoidance of course. As Bloomberg says, tax dodging is common is Greece:
Prime Minister George Papandreou’s drive to tackle the European Union’s biggest budget deficit and pacify investors who have dumped Greek assets may hinge on convincing more people … to abandon this tax-dodging tradition. Papandreou says that Greek workers and companies have skirted tax worth 31 billion euros, more than 10 percent of gross domestic product.
This was the root cause of the Russian problems, too. As Chiodo and Owyang say
… [A] weakness in the Russian economy was low tax collection, which caused the public sector deficit to remain high.
In fact the Russian situation was worse in that the tax collecting authorities collaborated with tax avoidance in some cases:
The majority of tax revenues came from taxes that were shared between the regional and federal governments, which fostered competition among the different levels of government over the distribution. … this kind of tax sharing can result in conflicting incentives for regional governments [who collected most of the taxes] and lead them to help firms conceal part of their taxable profit from the federal government in order to reduce the firms’ total tax payments. In return, the firm would then make transfers to the accommodating regional government.
The lesson is clear. The sun will set on those states that can’t persuade their citizens, especially their high-earning citizens, to pay tax. As Ruth Sutherland said in an excellent article in the Guardian recently
Paying tax has terrible PR. But it is actually a good thing to pay the right amount of tax… The contempt for taxpaying of the past few decades has gone hand in hand with greater inequality, strained public services and an unthinking faith in the market, ideas that are now discredited. As we head towards an election, it’s time for a new way of thinking.
Quite right, especially as the alternative may well be default.
Update. We can start here with Lord Ashcroft. It is outrageous that the biggest donor of a UK political party is in the words of Chris Huhne, `a tax dodger from Belize’. He, like anyone with a prominent role in national life, should be taxed in the UK on his full global income.
Red meat February 20, 2010 at 3:25 pm
I love these reds… Sometimes in winter all it takes is a flash of colour in the sun to lift one’s mood.
It is still commercial real estate, stupid February 14, 2010 at 10:22 am
Nice graffiti, shame about the delinquencies.
Jaime says stop making so much money February 9, 2010 at 8:48 am
I like naked capitalism: it often has interesting things. One of them recently was an article about liquidity buffers. I have to confess to laughing, though, when I first read it. The august head of the BIS was rechristened cuddly Jamie Caruana. Jaime wouldn’t like that. In fact, he doesn’t like much. As NC says:
Caruna, argued at a secret (not) central bankers’ conference in Sydney that banks also need to carry more in the way of liquid assets… [He] recommended that banks hold enough to allow them to survive a month without access to funding. Note that idea only seems radical now, since banks have spent decades perfecting the art of running lean. The rule of thumb in banking is to lend out $9 of every $10 in deposits. In the 1960s, only $5 of loans versus $10 in deposit was considered prudent.
Certainly if Jaime gets his way then it will make for icy times for banks. But perhaps that is what we want. It would certainly be politically popular: the bonus problem goes away if banks are less profitable. It would of course be stability enhancing too. But in the long term, will finance ministers really be willing to put up with a cost of credit as high as it would be under these proposals. Perhaps ultimately this will be battle ground of 21st century regulation: those on the side of stability vs. those on the side of growth.
Weather advice January 10, 2010 at 10:35 am
Snow is so much easier to bear in places that are used to it. Unlike, um, London.
Happy New Year to you all December 31, 2009 at 11:59 pm
A second December 15, 2009 at 7:16 pm
Parachutists sometimes count “A thousand and one, a thousand and two, …” since it takes roughly a second for each increment: it provides, apparently, a reasonably accurate measure of how fast the ground is rushing up towards you. So, this is post number a thousand and one, and thus by the peculiar analogising that you have been kind enough to put up with, a second. And in this second kilopost I should like to thank my readers for their attention, comments and interest over the last three years. Festive greetings to you all – well, all of you apart from the spammers. Normal service will reserve shortly. Meanwhile if, like me, you miss the sun at this time of the year, here is a poor but perhaps aesthetically pleasing substitute.
Kilopost: looking back, looking forward December 13, 2009 at 5:49 pm
This is post one thousand on Deus Ex Macchiato. Moreover, it is the traditional time of the year for reviews and previews. So let’s take a longer perspective, at least for today.
The loose – at times so loose as to be completely invisible – thread holding the blog together was how the rules of a system influence the behaviours it can display. Many of our examples have been from finance, but we have included various areas of science, transport, politics, and much else besides too. Since the rules of the game for finance are defined chiefly by regulation – including the dubious doings of the Basel committee – and accounting, these two topics have featured prominently.
When this modest enterprise started, in March 2006, the start of the Crunch was a year away, and only the savviest commentators were raising concerns about subprime mortgages. AIG and Lehman Brothers were still good credits, and Merrill Lynch was proudly independent. Yet even then, some significant issues with the financial system were evident.
Posting was a first fairly spasmodic on Deus Ex. We were still finding our feet. But the major themes started to emerge fairly fast. Some early posts on highlighted issues that are now well known but were rather less fashionable before the Crunch, including
- The importance of liquidity risk;
- The dangers of financial modelling based on the normal distribution – and thus ignoring both fat tails and history.
Then the crunch happened, and things started to get more interesting.
We were pretty soon on the trail of the monolines, and we have dealt with securitisation and ABS from well before the crunch, taking the view that products are not good or bad, but that they can be used in bad ways, especially by those who have not understood what they are dealing with. Caveat emptor still seems to me to be a reasonable principle for those dealing in the capital markets.
On the other side, we got Lehman wrong, judging that it would not be allowed to fail. Ah well: at least some of our market calls were right.
Away from finance, one theme has been cost benefit analysis. Evidence based policy making is vitally important for conserving scarce resources, especially given the current state of the economy. How you define `cost’ and `benefit’, though, can make a big difference to the answer you get. There’s model risk in a lot of places.
The financial system today is radically different from the one we started with. There are a few good points – including public desire for reform, and open, widespread discussion of fairer taxation systems – but the overall picture is pretty bleak. Some of the surviving too big to fail firms have got bigger. Reform has thus far been piecemeal, mostly ineffectual, and frequently watered-down. The political will to do more seems to be disappearing, especially in the US. It has been a hell of a ride, and a lot has been learned, but not it seems by the people in charge. Either that or courage really is a rare quality in a politician. But you don’t need me to tell you that.
Commercial Real Estate November 20, 2009 at 7:14 am
CRE prices are off roughly 40% in both the US and the UK.
Delinquency rates are rising, and office rents, even in prestige areas, are falling rapidly.
Deutsche Bank has turned into a casino operator (yes, yes, I know some of you think that this is not news).
John Carney has a nice summary of how we got to this point on Clusterstock, and many think that the future is bleak.
San Francisco Federal Reserve president Janet Yellen — not noted as a panic spreader — said that the prospects for the CRE industry are “worrisome.”
The phrase blood bath has even been used.
Very recently, however, there have been tentative signs of a mild upturn in both the US and the UK.
But, shameless blogger that I am, I am just using this background as an excuse to post a large format double exposure that I think is cute. Sorry. Normal service will be resumed at some point.
Always looking on the bright side November 17, 2009 at 6:44 am
See the sun! Ignore the muddy puddle. That’s the regulators’ way, according to a great post at Interfluidity:
In good times, regulators have every incentive to take banks at their optimistic word on asset valuations, and therefore on bank capitalization. It is almost impossible for bank regulators to be “tough” in good times, for the same reason it is almost impossible for mutual fund managers to be bearish through a bubble. A “conservative” bank examiner who lowballs valuation estimates will inevitably face angry pushback from the regulated bank… Valuations can remain irrational much longer than a regulator can remain employed…
When a “systemic” banking crisis occurs, regulators’ incentives are suddenly aligned with bankers: to deny and underplay, to offer forbearance, to allow the troubled banks to try “earn” their way out of the crisis. Regulators, in fact, can go a step further. Bankers can only “gamble for redemption”, but regulators can rig the tables to ensure that banks are likely to win. And they do.
The whole post is definitely worth reading. The key point though – that banking crises make regulators look silly, and thus they have an incentive to underplay the seriousness of the issue and to covertly help the banks earn themselves back into the black – is very well made. Now would be a really good time to be highly suspicious of asset valuations, loan loss provisions, and other counterparty performance evaluations.
They call them peepers October 17, 2009 at 5:05 pm
Leaf peepers that is. But you can see their point: Maine in the Fall is very pretty.
Out of town October 11, 2009 at 5:38 pm
I just wanted an excuse to post this picture really.
Subsidising religion October 5, 2009 at 9:13 am
It often pays to take a dispassionate look at entities. Before the great junk downgrade of 2005, for instance, an analyst pointed out that Ford was a great credit company with a mediocre car manufacturer bolted on the side: most of Ford’s profitability came from financing car purchases rather than making cars. Similarly BA is a terrible airline bolted on the side of a pension fund: the equity is driven to a large part by the pension fund deficit. This kind of insight can be useful in understanding the big picture. For Ford, for instance, it raises the question of what the right relationship between the finance company Ford Motor Credit and the car make should be.
What, then, is the Church of England? It’s a minor religion bolted on the side of a huge heritage organisation. As a heritage organisation, the CoE has significant advantages. It owns a huge selection of buildings from parish churches to the great cathedrals, as well as an enormous amount of land and other assets. It produces spectacles from weddings and baptisms to choral evensong. And its senior figures command both high office – 26 bishops sit in the House of Lords – and a significant measure of public influence.
So far, so anomalous. But it gets better. Not only does the CoE charge for many of its spectacles – a wedding runs from £150 to £300 or more – but it also charges for admission to many cathedrals and takes grants from the State for their maintenance. Now I have no problem with the CoE being an entirely private religion. Nor do I have a problem with Canterbury Cathedral, say, being supported in the same way that any national museum or important historic building is. But I do have an issue with it being both the private property of a entity which has plenty of resources and publicly funded.
Let’s remove the charitable status of religion entirely, make them pay tax on their assets, and thus provide a fair means of acquiring the great cathedrals for everyone. They are part of all of our heritage, and they should not be under the control of a minority purely thanks to a historical accident. The same principle applies to other religions. Done properly it would stop outrages like the Catholic Churches’ demolition of a building that was about to be listed.
This may seem harsh at first, but there is no confiscation involved, just a removal of previous privileges that are no longer justified. Surely it would be good for the religion to concentrate on, well, being religious instead of managing heritage assets?
Adair dares, and other unlikely tales, updated September 7, 2009 at 9:44 pm
The headline, of course, should have been British bank watchdog states the blatantly bleeding obvious, but I suppose that is a little more sensational than Financial Services Authority chairman backs tax on ’socially useless’ banks. Still, most observers would agree with Lord Turner that much financial activity is socially useless; that the banking sector is too big for the good of the economy; and that Tobin taxes would provide useful revenue while slimming down the bloated banks.
(Update: I should really say something about why Tobin taxes are good from a financial stability perspective. The point is that they introduce more friction into the financial system. Even a small absolute increase in bid/offer spread, when spreads are low, dramatically reduces arbitrage opportunities, and thus ‘useless’ financial activity. A real money transaction – driven by global trade for instance – would not notice an extra 0.05% on their FX rate; but a program trading volatility would. The same applies in the equity markets: one way to reduce the impact of high frequency trading is simply to make it (marginally) more expensive.
It is interesting to see Lloyd Blankfein, Goldman Sachs’ CEO, agreeing with Turner that some of finance had become socially useless. There were always useless parts, of course, but the fraction has grown significantly over the last 20 years.)
So how would we make this work? Well, how about this for a Europe-wide proposal. Transactions physically done in Europe are taxed. In order to (a) sell securities to a European domiciled investor, (b) take deposits in Europe or (c) trade derivatives, FX or repo with a European counterparty, you have to demonstrate that you pay the tax on your global business too (although not necessarily to a European government: any old government will do). OK, some banks would decide to leave Europe entirely. But most wouldn’t if the level of the tax was sufficiently low…
Oh I do love to be beside the sea side August 31, 2009 at 7:44 am
Willem Buiter took a month off from his FT blog, and I think I am going to follow that lead, so expect something in September. Meanwhile, here’s some coastline.
Don’t judge me August 4, 2009 at 6:05 am
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Paul Krugman has a post entitled Rewarding bad actors. He takes the view that two situations – the profits from high frequency trading at Goldman (and presumably elsewhere) and the payout to Andrew Hall at Citi’s Philbro arm – are undesireable. The common thread, he says, is in both cases we’re looking at huge payouts by firms that were major recipients of federal aid… What are taxpayers supposed to think when these welfare cases cut nine-figure paychecks Now, I happen to agree with Krugman that both of these situations suck. However, I think his characterisation of the problem is wrong. He says. we’ve become a society in which the big bucks go to bad actors, a society that lavishly rewards those who make us poorer In other words, the problem is bad people. That’s too easy. It allows us to point out fingers and take no responsibility. No, the problem isn’t evil people. The problem is that we have created a system where unhelpful actions are rewarded. It is the system that is at fault, not the actors. This means that many people are responsible: everyone who failed to promote or support change, and all of those who shaped and defended the current system. Yes, that does include me. But at least I am trying to promote a debate about what rules we need for the future. |
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Just privatise them? July 5, 2009 at 7:20 am
Ken’s right. Can we now, please, at least five years too late, renationalise the railways. After the National Express disaster, it is time to acknowledge that PFI is bollocks and that private franchisees for public infrastructure amounts to nothing more than a grant from the state to shareholders in the good times and socialised loss in the bad ones. Sorry to the crude language and bald assertions, but this waste of money by the ideologically challenged really annoys me.
Update. Felix Salmon has a fascinating piece on the costs of driving in cities here, and how sensible congestion charging combined with fare revisions can make everyone’s travel more efficient. While I am not convinced that fixed pricing is the right approach – letting investment bankers who can afford it drive while less highly waged workers are forced onto the subway – there are clearly some very interesting results in the work Felix describes. The right approach would be a variable tarif based on income, so that the congestion charge depends on how much grief you cause other people, how much carbon you emit, and how much you earn, but that is politically impossible.
Shotguns and blowups July 3, 2009 at 8:43 am
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From Mark Gilbert on Bloomberg: If the aftermath of the credit crunch is a financial landscape featuring fewer banks, each even bigger than before because of government-engineered mergers and opportunistic takeovers of weaker brethren, then we should all be very afraid. That, though, is exactly where we are headed. The whole article is spot on: I recommend it. |
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How big? The answer is 24 (or 42 backwards…) June 5, 2009 at 5:45 am
(You really can ignore this if you have no interest in digital photography…)
I went to a lecture last night on digital camera sensors. As you probably know, each pixel in a digital camera is composed of at least one photosite (sometimes as many as 4, but ignore that for this discussion). Each photosite is basically a switchable photoelectric capacitor: light comes in, some of it is converted to electrons by the photoelectric effect, and the resulting electrons are stored.
Now, here’s the kicker. Each photosite can only store tens of thousands of electrons. How many exactly depends on the size, but it’s a number like 50,000.
This is really a problem. Why? Well, for two reasons. First the resolution of the camera depends on the signal to noise ratio of the photosite. Quantum effects (in particular shot noise) limit the resolution – and short of increasing the size of the photosite, there is absolutely nothing you can do about this. Second, to read the data out, you need to be able to move and then measure those 50,000 electrons accurately. And that isn’t easy either.
Now there are various smart things you can do, including putting in on board noise reduction in the sensor and doing your A2D conversion as near to the photosite as possible. But at the end of the day, noise reduction just amounts to guessing what the signal should have been. The fundamental camera resolution is limited by the number of photosites you can cram on the chip, and the more you cram on, the smaller they get, the fewer electrons they can hold, and the worse your noise problems get.
What’s the limit? Well, it turns out that for really high performance sensors, 35 square micrometers is about as small as you want a photosite to be, or roughly 6 micrometers on a side. 35mm is 24mm x 36mm, which translates to 4000×6000 or 24 megapixels. This is more or less exactly where the best full frame sensor DSLRs are already.
In other words, the resolution wars are over. New digital cameras will either cap out around 24 megapixels, have high noise and/or very aggressive and intrusive noise reduction, need bigger than full frame sensors, or use a wholly different light sensing technology from the one we have been using for the last 20 years. High noise is intolerable, bigger than full frame sensors are very expensive because they require huge pieces of silicon, and a new photosite technology does not appear to be around the corner.
Now, 24 Mp is enough for very nearly all applications, and most of the people who need more will move to medium format digital. But still it is sobering to think that a technology that we have been used to delivering seemingly effortless performance increases every two or three years is close to the quantum limit already.
OK, that’s enough of that. Back to the economics.
Anish Does Brighton May 21, 2009 at 6:11 am
When you want to come bottom of the list May 13, 2009 at 7:58 pm
Bruce Krasting has an interesting story on sub-prime related litigation in Massachusetts:
Goldman has agreed to pay the state of Massachusetts $60 million to settle a dispute regarding Goldman’s “predatory lending” practices in and around Boston. $50 million will be made available to reduce the loan principle on 714 individual mortgages… In the critical years 2005-2007 Goldman was ranked 15th in the League Tables for sub prime and Alt-A origination/securitization. Goldman’s management must be pleased as punch with that poor showing today.
As Bruce says, this is not a big deal for Goldman — but it might set a nasty precedent for those higher up the subprime ABS underwriting tables, notably BoA (labouring under both Countrywide and Merrill) and Citi. You can expect this story, like Enron-related litigation, to run and run.
Update. A different account of the case from Jonathan Weil at Bloomberg is here. His take is that Goldman paid greenmail to Mass, perhaps to avoid the disclosure associated with a full hearing. His article certainly makes interesting reading.
Competence and the consumer April 25, 2009 at 8:52 am
I had a nasty shock the other day. There is a snake’s head fritillary on my balcony that was looking rather nice, and I took a picture of it. The image was out of focus. Now, my digital camera is both sophisticated and perfectly capable of handling the conditions, so I wasn’t pleased. But I forgot about it until I saw this post on DIY auto focus adjustment.
It looks a bit tricky, but actually it isn’t. After an hour, I had recalibrated my Pentax’s AF, and it is now much sharper. But what shook me – almost stunned me – was how far out the camera was. 260 microns. That’s like trying to get to the Tower of London and ending up in Milton Keynes. My naive assumption that a piece of high end consumer electronics would be properly calibrated out of the box was obviously very foolish.
Of course, by the time I had got this done, the fritillary flower had fallen, but here’s a 100% crop from an image of some blossom, taken with the newly calibrated AF:
I wouldn’t say the focus is absolutely perfect, but it is an awful lot better than it was, and close to the best that is achievable without lab equipment.
It is interesting that things like my camera are limited not by their maximum performance, but by the competence of the factory and distribution system. Given that these problems get much harder for higher resolution cameras – see here for an extended discussion of calibrating medium format digital backs – you might want to pause before buying a camera with more than 10M pixels. It might be fine out the box, but it might well not be, and if it isn’t, extracting the performance that the camera is capable of can be a tedious business.
Becoming French April 23, 2009 at 6:35 am
Matthew Lynn, in a typically opinionated and wrong-headed piece on Bloomberg, thinks
The British economy is becoming increasingly French.
Why which he means
It will have a huge tax burden to carry, a state that is the dominant actor in the economy, and a system whose resources are managed more by some kind of national plan than the free hand of the market. The government is now explicitly emulating France, with its national champions.
Sadly this leaves out the good parts about the French economy: the generous welfare system; good education and health care; job security (at least for some); rational working hours for many. No, the UK isn’t becoming French. It is becoming much worse: French for big companies, but American for ordinary workers. That’s like having Italian railways and Swiss fashion.
Strained, but not entirely silly banking system metaphor no. 152 April 9, 2009 at 7:12 am
Happy Easter to all. Deus Ex will return on Monday or thereabouts.
Strained, but not entirely silly banking system metaphor no. 151 April 7, 2009 at 8:31 am
If you go down to the Bank today, part 2 April 1, 2009 at 5:09 pm
Again, my favourite first:
If you go down to the Bank today, part 1 at 5:02 pm
My favourite first:
Strained, but not entirely silly banking system metaphor no. 149 March 27, 2009 at 10:08 am
Details, details March 20, 2009 at 10:29 am
Martin Wolf is a little harsh on Lord Turner in the FT. He says:
First, it does not explain why we can hope to contain the behaviour of companies too important to fail.
True, but increased capital requirements will certainly help, along with better supervision of liquidity risk. The devil is in the details, I know, but Turner has not clearly not addressed this.
Second, it does not demonstrate that regulators can contain regulatory arbitrage by profit-seeking financiers.Third, it does not deal with risks posed by institutions that may be too big to rescue by some host countries.
Stronger supervision of on-shore entities without too much respect for home country supervision of the parent will help. And Turner is surprisingly harsh on the EU passport regime. Clearly there is a limit to the extent of the UK’s extra-territoriality, but within that Turner is certainly looking in the right direction.
Fourth, it does not explore the room for charging heavily for guarantees.
Fair point. I should like to see a UK version of the FDIC scheme where all banks pay a premium for the deposit insurance the government sells to them. This premium should I believe be strictly based on the notional of deposits, and not on any risk measure of the deposit taker (which will always let the big boys off lightly).
I still like the idea of taking this deposit insurance premium in the form of a call option on the bank’s stock (which the regulator would hedge, hence locking in its value), but obviously this is fairly left field.
TALF to Taxpayer March 17, 2009 at 5:50 pm
The TALF says: please take a seat.
(The FED press release is here. Useful commentary from Philip Gelston of Cravath, Swaine & Moore via Marketpipeline is here.)
Two things which seem to go together at the moment March 14, 2009 at 11:53 am
Strained, but not entirely silly banking system metaphor no. 148 March 7, 2009 at 7:10 am
I will stop doing this soon I promise. But this is too good to resist.
Strained, but not entirely silly banking system metaphor no. 147 March 5, 2009 at 8:48 am
Deputy what? February 20, 2009 at 9:47 am
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This is so far beyond sarcasm that I am going to report it straight. Bloomberg tells us:
This program worked so well none of the five are around in their prior form: two are bankrupt, one was forced to sell itself in a hurry, and two turned themselves into banks. Truly failure is its own reward. (OK, I lied about the sarcasm.) |
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A little light relief February 18, 2009 at 7:28 am
“Knock knock”
“Who’s there?”
“Maybe it’s a big horse*.”
“Maybe it’s a big horse who?”
“Maybe it’s a big horse I’m a Londoner that I love London town**.”
[Hat tip the Guardian Diary.]
* Gratuitous Mark Wallinger reference.
** Classic footage here.
Bad banking February 10, 2009 at 8:50 am
Willem Buiter suggests that Many high-profile, large border-crossing universal banks in the north Atlantic region are dead banks walking – zombie banks kept from formal insolvency only through past, present and anticipated future injections of public money.I think this is over-stated. We simply do not know if they are solvent or not. We do know that without state support many of them cannot raise funding, but that is different from insolvency.
In this context, let us walk through a clean up process. Suppose that the state decides that a bank can no longer continue as is. The bank is seized. Its business and deposits are spun off, either as a depositor-owned cooperative (actually my favourite answer) or if need be as a new good bank. That leaves the old toxic assets. What should happen to them?
The problem is two fold. Many of these assets are illiquid and impossible to value. Moreover they cannot be funded on a stand alone basis. In order to prevent a collapse of financial asset values, the state can, and should, assist in funding these assets at a reasonable rate. So… put the assets and liabilities into a new vehicle, aka a bad bank. Do not comingle assets and liabilities from different banks: have one bad bank per rescue.
Any given bad bank will have mismatched funding, in general. Now comes the problem. What do we do with debt which matures before assets? To make this concrete, suppose that the bad bank contains $100M of 5 year loans, funded with $10M of shareholder’s funds, $40M of short term senior notes, and $50M of 5 year bonds*. The loans will not all pay, and the equity is likely worth nothing, but we do not know that yet.
The notes mature in three months. But they cannot be paid in full because the government at that point the central bank would have to step in to provide more funding for the vehicle. I don’t see any alternative to maturity extending the note holders out to five years, at which point we will know how much the loans are really worth. At that point we can allocate funds according to seniority, with the state getting paid first, followed by the senior debt holders, followed by the equity holders if there is anything left. But should the extended debt pay interest, and if so, at what rate?
It does worry me slightly that this is inequitable between the note holders and the bond holders. The bond holders expect to get paid in five years, and they will be (albeit not necessarily getting par). The note holders expect to get paid in three months, and they have to wait five years too. Seniority matters, but maturity doesn’t in this model.
Moreover, what should we do about off balance sheet commitments in this model? If the loans had been swapped to floating, say, matching floating rate liabilities, then we may need these instruments. Yet at the moment, anyway, all derivatives would terminate on take-over. And what about committed lines of credit?
I only make these points because it is really not clear to me what the clean up regime for banks should look like, and what is genuinely equitable to the holders of all the different types of claim that there may be. Designing a new insolvency regime is a non-trivial matter, especially if you want both to avoid moral hazard and to avoid unjustified appropriation.
Update. *It would be more realistic to say $10M of 5 year bonds and $40M of government loan, since typically we will have sold the deposits which are funding some of the assets on.
Lacking brutality February 9, 2009 at 9:11 am
Information Arbitrage thinks, and I agree, that the Geithner plan due tomorrow will fail.
Why? Excessive complexity. For a plan of this magnitude to work, it needs to be straight-forward, easy to understand, clearly communicated, brutally transparent, and ruthlessly executed.
Certainly the bailouts have revealed that the US system is not good at generating simple, easy to execute schemes. Remember how the first TARP went from 3 (admittedly ridiculous) pages to 451 pages in its legislative passage? You can’t govern effectively if you have to throw ten pages of stimulus at every single interest group in order to get something passed.
The new face of the possible February 4, 2009 at 11:27 am
Warning: this is a change from our usual programming. If you are not interested in the theory of interacting systems, you might want to skip it.
One of the things that has really changed with the widespread use of computer models is the achievability of perfection. What do I mean? Well, one big difference between a computer model and reality is the ability to restore state. That is, to make the world just like it was earlier. The undo button. You really can, in a model (and by `model’ I include programs like Word or Excel, computer games, and so on as well as more obviously model-like things) undo the result of some action as soon as it goes wrong. That is much much harder in the physical world, as anyone who cooks or does DIY will affirm. What this changes is the how hard it is to do some difficult things.
Suppose you have a 1 in 1000 chance of getting something right. What that thing is doesn’t matter – think of making the perfect Bearnaise, or building a shed, or jumping just right so that Lara Croft navigates over a chasm. In the real world, it may take many many tries before you get it right. The amount of time required is considerable. In a computer model, though, if you save frequently, you can just restore from the last good point. So if that 1 in 1000 is the result of three separate 1 in 10 actions, then you can treat each separately. As soon as you get one of them right, you never have to do it again, as you can restore the state just after you succeeded. This dramatically changes the amount of time needed to do difficult tasks that rely on a sequence of smaller but still hard-to-do things. (It changes the hardness in particular from multiplicative time in the number of steps to additive time – as any complexity theorist will tell you, that is huge.) At least in a virtual world, perfection really is sometimes possible.
Steps to making a bad bank February 2, 2009 at 10:52 am
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For a lot of reasons, I think a bad bank without prior nationalisation is a bad idea. But if you were going to do it (as lots of people now seem to think is likely – see FT alphaville here for a summary), what would you do?
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Your real estate data point of the day January 20, 2009 at 5:08 am
One of the points I have repeatedly mentioned is that it did not take a very large fall in house prices to create the credit crunch. Contagion and widespread bank stress had begun by early 2007 despite falls at that point of only 10% or so nationwide. But of course the falls in the worst affected areas – including Florida, Nevada, and California – were rather worse. And since 2007, as Bloomberg points out, things have got quite a lot worse. In particular rising volumes of foreclosures are driving steep price falls:
A total of 19,926 new and existing houses and condos sold last month in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties, up from 13,240 a year earlier… The median home price in the region fell 35 percent to $278,000…Foreclosed homes accounted for 56 percent of Southern California’s December sales, more than double the amount a year earlier, MDA DataQuick said.
Such transactions made up almost 70 percent of sales in Riverside County, where the median price plummeted 41 percent to $209,000. Sales jumped 77 percent to 4,435, MDA DataQuick said.
Really… January 18, 2009 at 11:49 am
I leave you lot for a week in Asia, and when I come back, the banking system is broken, RBS has announced the largest UK corporate loss ever, BofA has taken another $20B of TARP money and a $100B asset guarantee, and Ireland has nationalised Anglo Irish Bank. I can’t leave you alone for a moment can I?
Holidays in Financial Capitals December 28, 2008 at 8:59 pm
With apologies to the Dead Kennedys:
So you been at the bank
For a year or two
And you know you’ve seen it all
In a company car
Thinkin’ you’ll go far
Back east your type don’t crawl
Play ethnicky jazz
To parade your snazz
On your five grand stereo
Braggin’ that you know
How the niggers feel cold
And the slums got so much soul
It’s time to taste what you most fear
Right Guard will not help you here
Brace yourself, my dear:
It’s crunch time in London
It’s tough, kid, but it’s life
It’s crunch time in London
Don’t forget crime is rife
You’re a star-belly sneech
You suck like a leach
You want everyone to act like you
Kiss ass while you bitch
So you can get rich
But your boss gets richer off you
Well you’ll work harder
When your group is downsized
For a hundred a day
Slave for bankers
Till you go mad
Then your head is skewered on a stake
Now you can go where people are one
Now you can go where they get things done
What you need, my son:
It’s crunch time in London
Money the banks do lack
It’s crunch time in London
Where you’ll kiss ass or crack
Gor-don Gor-don Gor-don
And it’s crunch time in London
Where you’ll do what you’re told
It’s crunch time in London
Where the dole’s got so much soul
A new tool December 23, 2008 at 8:22 am
There has been a lot of comment over John Gieve’s comments to the BBC. The programme has not been broadcast yet, so let me confine myself to one point. Gieve apparently says
Maybe we need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand… I think we need to complement interest rates, which are a blunt instrument – you set one interest rate for the whole economy – with something which is more financial-sector specific.”
I would suggest we have at least two such things already. One is capital requirements. The other is monetary policy, specifically the implementation of policy via the money supply, which collateral qualifies at the window and the exact rules concerning bank reserve balances.
Update. I have now seen the program: it is mostly a Robert Peston hagiography, which I had hoped was beneath the BBC. Still I suppose if Jonathan Ross can’t get fired for what he did it is too much to expect the Corporation not to laud Peston’s rumour mongering.
The most interesting remark in the program for me came from John Varley. Asked if banks had taken too much risk before the Crunch, he said that they did. But he then went on to say that regulators and politicians `acquiesced in this extraordinary boom’. As a judgement that struck me as very much on the money.
It’s your day, Bill November 9, 2008 at 10:52 pm
‘Twas the day of the election, and there was much celebration. No one stirred in the farmhouse before noon on the following day, and the word went round that from somewhere or other the agencies had acquired the money to buy themselves another case of courage. So Moody’s cut Ambac to junk. They weren’t too late really. If you count in geological time.
Two sensible comments October 17, 2008 at 8:12 am
The first from Clusterstock:
Many of our financial institutions are insolvent. They aren’t healthy victims of bank runs. They are ailing institutions barely kept alive by frantic rounds of capital raising. The lessons of the Great Depression simply don’t apply here.In fact, we’re probably making things worse. Allowing insolvent institutions to fail and requiring worthless and worth less assets to be fully written down would provide transparency to the market. Instead, we’re dedicated to the post-Lehman proposition of “Never Again.” The various programs of our government continue to obscure asset pricing and conceal insolvency. This means that you can’t trust the market to tell you which firms are failing.
Twisting the arms of bankers to lend to institutions that may be insolvent is a recipe for deepening the crisis. We’ve just been through a period of malinvestment–we spent too much borrowed money on junk. Borrowing more to spend on junk only digs us in deeper.
Bank lending won’t get going again until trust in the markets can be restored. Fighting a Great Depression era problem probably won’t help. More transparency, which means more write-downs and failures, is probably necessary if we’re going to get through this.
I don’t think we know enough about the current situation to know if this is true, but it certainly could be. Unfortunately the recent accounting changes make it harder to find out, too. The Japanese lost decade certainly suggests that keeping failed institutions on life support is the wrong approach – but equally Lehman showed that letting firms fail in the wrong way is catastrophic for market confidence. We need banks to be able to prove to the market’s satisfaction that they are solvent, and prove that fairly soon. If the government recap gets us there, then fine. If not, even more drastic remedies are going to be needed.
Second, from an interview by Lord Turner in the FT:
Lord Turner said regulators would also now have to examine mark-to-market accounting, bankers’ bonus structures, the way in which financial institutions transfer risks, and the frameworks for regulating banks’ liquidity and capital.
He said the capital reserves imposed on banks last weekend were necessary to restore short-term confidence, and that the watchdog would have to work on a longer-term framework for setting capital.
He warned, however, that it could be some time before an international agreement could be reached. Some regulators believe it is necessary to scrap the Basel II framework, while others believe it can be adapted.
[Emphasis mine.] It is most reassuring to see that the new head of the FSA is willing to contemplate scrapping Basel 2. The Basel 2 capital regime has served us very badly: it’s pro-cyclical, imprudent in places and aggressively conservative in others, full of model risk, and far too complicated. Let’s start with a clean sheet of paper, and demand that the rules be simple, demonstrably prudent but fair across risk types (and accounting methods), and as little dependent on models as possible.
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Lessons from 2001 October 10, 2008 at 10:27 am
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The last time there was this big a market rout, I learned a few lessons.
And if that doesn’t work, pull up the drawbridge. |
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The Regulatory Big Picture September 17, 2008 at 9:15 am
Amid extraordinary scenes – the failure of Lehman, the purchase of Merrill, a $85B FED line to AIG (albeit it at L + 850) – it is appropriate to consider the big questions that face the Americans.
Firstly, note that the FED has acted, but that what it has done is very much policy making on the fly. Suspension of Section 23a of the Federal Reserve Act, for instance, may well be illegal. And in the AIG support, the FED is off the edge of the US regulatory map. The politicians want to get involved, and in due course they will.
So what are the questions?
Firstly, is there any role left for separately regulated broker/dealers? My sense chimes with the majority opinion that the answer to that is no. With 2 big clients left out of 5 at the start of the year, the SEC (and specifically its capital regime) does not emerge covered in glory. How should the broker/dealers be supervised going forward?
Secondly the insolvency regime for financials needs to be addressed urgently, in the UK just as much as the US. In particular exactly when can the regulator seize the vehicle, what happens to the holders of subordinated claims at that point, how derivatives claims (with their effectively supersenior definitions of termination events) interact with that, and the issues involved in making cross border insolvency fair need to be thought about hard.
Thirdly and perhaps even more controversially, what about insurers? US state insurance regulation is complex, capital requirements for financial risk are simplistic, and the US regime has not come out of the Crunch looking good. Think of the monolines as well as AIG. I am not sure the European answer is much better, but at least Solvency 2 is an attempt to address the issues.
Finally, a lot boils down to leverage. Capital rules were supposed to constrain leverage. They didn’t, thanks to numerous failings. Free passes to SIVs and conduits, the lack of capital for liquidity risk, VAR based market risk capital which ignored fat tails, capital based on rating, the Basel 2 treatment of residential property: all of these were gross failures of regulatory prudence. It is, I fear – and I know how many careers this would threaten and how unlikely as a result it is to happen – time to throw away Basel 2 and start again. We need a set of capital rules which are appropriate for a wide diversity of risk taking, from AIG FP through Cheyne Finance and MBIA to Lehman Brothers (R.I.P.) and on to traditional banks like Santander. They need to be anti-cyclical, and they need to be fair. That means no grossly preferred asset classes, accounting methods, nor ways of taking risk. It is a big job, but it desperately needs doing. Whither Basel 3?
What works September 7, 2008 at 7:09 am
Sometimes, just sometimes, you read something so good that it makes every other piece of journalism you’ve read recently seem thin, dull, and without insight. Ross McKibbin’s article in the current LRB is that good.
McKibbin cut through the rhetoric admirably. He points out the hollowness of Blair’s promise to go with ‘what works’, indeed to the very antithesis of it:
The culture of the focus group does not, however, lead to an apolitical politics. On the contrary, it reinforces the political status quo and encourages a hard-nosed, ‘realistic’ view of the electorate that denies the voter any political loyalty, except to ‘what works’. ‘What works’, though, is anything but an objective criterion: these days it is what the right-wing press says ‘works’. The war on drugs doesn’t work; nor does building more prisons; nor, one suspects, will many of the anti-terror laws. But that doesn’t stop ministers from pursuing all of them vigorously. New Labour in practice is much more wedded to what-works politics than the Conservatives were under Thatcher, who was openly and self-consciously ideological.
Much of the present malaise in British politics flows from this. Among other things, what-works gives the wrong answers.
He also points out, amusingly, that we do in fact have three parties in parliament. They are just not the three parties whose names appear on the ballot paper. A more accurate arrangement based on ideology rather history would have:
A party of the moderate left, undoubtedly led by Vince Cable, which would include some Labour backbenchers (but no member of the present government), some Lib Dems (but probably not their leader), and perhaps Tories like Kenneth Clarke and Ed Vaizey. There would be a centreish party which would include Brown, some members of the cabinet, most Lib Dems, a large part of the Parliamentary Labour Party, probably William Hague, Theresa May, Alan Duncan and a few other Tories; Cameron and Osborne might be honorary or temporary members. The party of the right would include everyone else (including many members of the government).
There is much else of value in the full article and I would encourage you to read it. But even if you don’t, at least rejoice that there is still journalism of this quality going on in this country.
LEH August 28, 2008 at 6:14 am
I am (1) above the waterline on Lehman and (2) starting to take it personally. This is usually a very bad sign for a position. There are doubtless hazards to navigate ahead but I think there may be more value there if Fuld can get something done soon. Despite Bloomberg’s (reasonable) concerns about Lehman’s mortgage assets and, according to FT alphaville, only three suitors remaining in the chase for the asset management unit I still there is the possibility of a surprise on the upside here.
Analytical Fiction August 25, 2008 at 9:11 pm
No, not a post on Kristeva (although you might call it one on American Pragmatism). Rather — and this is a little cruel, so of course I am going to do it anyway — a link to a series of embarrassing pictures showing Citi’s research call on the broker/dealers and their actual performance. It’s not pretty, but then trying to make short term calls on the markets rarely is. That’s my excuse for Lehman being off 6% today, and I am sticking to it…
Time to get away July 28, 2008 at 11:20 am
I will be away for two weeks. Please try not to let Fannie or Freddie fail while I’m gone: I would hate to miss a big splash. And if MER, C, UBS and the rest can keep the writedowns under $10B each for a few weeks, that would be good too. But hey, I’m a realist, big things sometimes happen.
And now you die… July 25, 2008 at 11:29 am
This was my favourite blog title of the day: And now young monoline… you will die. Accrued Interest makes some good points, and indeed it must be frustrating trying to run a monoline when one’s de facto regulator, the ratings agencies, keep changing the capital model. However:
- It was clear that the capital models used up to mid 2008 were flawed, and so volatility in capital required for a AAA was to be expected.
- One of the key parts of an insurer’s business model is time diversification. Business underwritten in one year diversifies that written in another, and losses in one year – subject to enough capital being available to continue – can be offset by higher premiums the next year. For the monolines though this does not work any more as there is much lower demand for muni wraps and those that are getting done are mostly being written by Berkshire. So the agencies are right to account for this change in their re-rating of the monolines.
Anyway, Bill Ackman might fancy being able to buy another small country, so it is about time for another wave of monoline downgrades.
Should the government take mortgage price risk? July 24, 2008 at 7:22 am
Felix Rohatyn and Everett Ehrlich had some suggestions in the FT yesterday for how the bailout of the agencies (and the rest) might proceed.
One option would be to design terms on which the Treasury would create “certificates” that would be swapped for conforming mortgage assets up to a predetermined percentage of banks’ capitalisation, together with a schedule for swapping these certificates back to the Treasury over the next three to five years. This would give banks breathing space to meet capital standards while the housing market stabilised. The prospect for government participation in any upside could parallel the Chrysler bailout that worked quite successfully almost 30 years ago.
Presumably these certificates would carry the faith and credit of the U.S. government and hence would trade like T bonds. But how would the upside participation work? If the government sells the mortgages back at their then current market price – however that is determined – it is taking mortgage price risk. Possibly hundred of billions of dollars of it. For the authorities to fund illiquid assets for three to five year is reasonable: for them to take market risk over that period surely introduces massive moral hazard. Central banks are de facto funders of first resort: asking even more of them is probably a mistake.
Eat (a little of) what you kill July 21, 2008 at 7:39 pm
FT alphaville is I fear too tough on some of the European Commission’s proposals to alter the Capital Requirements Directive. There is in fact much to like about the Commission’s original approach (if not its subsequent pirouettes). The key section of the original is:
the originator credit institution shall calculate the risk-weighted exposure amounts … for the positions that it may hold in the securitisation. The risk-weighted exposure amounts for the originator credit institution shall not be less than [15%] of the risk-weighted exposure amounts of the securitised exposures had they not been securitised.
This is really good. It means that institutions cannot get rid of more than 85% of the capital, whatever they do, and so they are encouraged to keep at least 15% of the risk. I would feel happier with 25%, but 15% is a good start at ensuring alignment of interests.
Of course the objection to this is that – since this is an EU rather than a Basel proposal – it leads to a competitive disadvantage to EU banks. For here we get the Commission’s suggestion of a requirement that any originator keeps 10% of any risk if they want to sell to an EU bank. That, admittedly, isn’t a very sensible suggestion. The original proposal was just about portfolio credit risk transfer, not syndicated loans, not single name CDS. Rather than frantically making alternative proposals the Commission should stick to the original idea, and ideally try to persuade the Basel Committee to agree to it too. Capping regulatory relief on securitised exposure at 85% is sensible. Bravo Brussels. Now don’t stuff it up by panicing when the Banks say they don’t like it. They don’t have to like it. It just has to be the right thing to do.
The pain in Spain stays mainly away from the plain July 15, 2008 at 12:01 pm
From Reuters via a decidedly dubious post on FT alphaville (which signally fails the ask if the large European retail banks are hiding all the pain in accrual accounted books): the largest Spanish corporate default ever happened yesterday.
Spanish property company Martinsa Fadesa said it would file for administration after it failed to raise funds and meet debt payments, marking one of the biggest corporate failures in the country’s history…
The company added in a statement that it would focus on selling assets to repay creditors, which include Caja Madrid, La Caixa, Ahorro Corporacion and Morgan Stanley.
Spain is a classical bursting bubble market with a way further to fall. Speculative building has been rampant, particularly on the coasts, and development controls were lax. Now prices are falling and controls are tightening the construction companies and their financiers are feeling a lot of pain. If Caja wasn’t the Spanish version of a GSE, it might well be in trouble. In fact the parallels between the Spanish Caja and Freddie & Fannie are a little too obvious for comfort…
Keep the red flag flying here July 13, 2008 at 7:54 am
Over the White House, that is.
Willem Buiter is most entertaining on the GSE bailout:
The financial assistance offered to US homeowners through the spagetti of federal financial inducements (ranging from the tax deductability of nominal interest payments to the subsidisation of mortgage financing provided by the FHA and the GSEs) is not primarily socialism for the rich. It is socialism for the electorally sensitive, rather like the agricultural welfare state that exists in the US.
So let’s call a spade a bloody shovel: nationalise Freddie Mac and Fannie Mae. They should never have been privatised in the first place. Cost the exercise. Increase taxes or cut other public spending to finance the exercise. But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies. These GSEs were designed to make losses. They are expected to make losses. If they don’t make losses they are not serving their political purpose.
So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA. Granted, the US version of socialism is imperfect thus far. The federal authorities have mainly intervened to socialise the losses in the financial sector while allowing the profits to continue to be drained off into selected private pockets. But that is bound to be an oversight. It surely cannot be the intention of such committed Marxists to target taxpayer-funded largesse solely at the very rich and at a few favoured, electorally sensitive constituencies. Fannie and Freddie are, or will be, safe in the hands of comrades Paulson, Bernanke and Lockhart.
Calculated Bunk July 11, 2008 at 6:34 pm
Calculated Risk has a post on Fannie and Freddie that defies belief. Commenting on the suggestion that the US government should bail out the agencies without screwing the stock holders – for instance by buying new sub debt to provide liquidity – they say:
If this blog’s comment threads are any kind of representation of a slice of reality–I am often agnostic on that question, but still–there are more than a few people who are more interested in getting a front-row ticket to a morality play than working through a financial crisis with the least (further) damage to the banking system. Lord knows that a lot of bad policy can be floated along under the guise of “pragmatism,” but I for one would rather try debating with a pragmatist than a purist or a moralist.
Two words Tanta – moral hazard. It is vital that any government support of the agencies is at the cost of the equity owners. To do anything else isn’t pragmatism, it is the grossest and least defensible public subsidy of the providers of risk capital. By all means let the US government support the Agencies if it judges that to be in the national interest. But do it in such a way that those who were perfectly happy with the rewards of Fannie and Freddie’s absurdly high leverage also bear the consequences of it. Capitalism is a broad church but it does not include privatised gain and socialised loss.
How important is securitisation for funding mortgages? July 3, 2008 at 7:22 am
Very. The FT quotes research by Meredith Whitney at Oppenheimer which suggests that since 2000, the volume of US mortgage lending financed by securitisations was seven times higher than the level funded on balance sheet. In 2005-07 alone, securitisations accounted for $2,500B of American mortgages, compared with $431B for on-balance-sheet loans. (I’m paraphrasing rather than quoting as the FT article is so badly written.) And that is one reason why you’d better hope the plain vanilla RMBS market comes back to full health fairly soon.
Update. Deutsche has a nice graphic on the rollercoaster of securitised mortgage lending:
Fed, SEC Near Accord To Redraw Wall Street Regulation June 23, 2008 at 10:46 am
Am I the only one to think that a more comprehensive solution to the fractured US regulatory landscape is needed than just to increase cooperation and information-sharing between the central bank and [the] SEC as the WSJ reports is in the offing? What about alignment of capital requirements? You need to rebuild the whole building, guys, not throw a tarp over it and call it fixed.
Consider prime jumbos June 2, 2008 at 11:19 am
Yields are attractive. From the FT:
US mortgage rates soared last week amid a sharp rise in Treasury market yields, as investors started to bet that inflation pressures could prompt the Federal Reserve to raise interest rates later this year.
The sell-off pushed rates on 30-year fixed-rate mortgages to an 11-week high of 6.02 per cent, up from 5.81 per cent a week earlier, according to Bankrate.com. Meanwhile, the so-called “jumbo” mortgages – or those for loans above $417,000 – rose to 7.21 per cent from 7.05 per cent.
A rough duration hedge is 7 year swaps at 4.4%. I’ll take more than two and half percent running for prime jumbos vs. swaps.
How long before things are back to normal? May 26, 2008 at 4:11 pm
I have belated managed to read the OECD document The Subprime Crisis: Size, Deleveraging and Some Policy Options. It’s a little scary.
It could take 6-12 months for banks to offset losses via earnings alone
And that is based on $350B or so of total losses. If the uber-bears are right and it is a trillion, presumably it will take three times longer.
On Tragedy May 13, 2008 at 12:26 pm
A frequent correspondent who I respect highly has just given me two new pieces of vocabulary: anagnorisis and hamartia. Wikipedia’s entries can be summarised thus:
- Anagnorisis (ἀναγνώρισις), also known as discovery, originally meant recognition in its Greek context, not only of a person but also of what that person stood for, what he or she represented; it was the hero’s suddenly becoming aware of a real situation and therefore the realisation of things as they stood; and finally it was a perception that resulted in an insight the hero had into his relationship with often antagonistic characters.
- Hamartia (ἁμαρτία) can be seen as a character’s flaw or error. The word is rooted in the notion of missing the mark and covers a broad spectrum that includes accident and mistake, wrongdoing, error, or sin. In Aristotle’s Nicomachean Ethics (didn’t you always want to write that clause in your blog?) hamartia is described as one of the three kinds of injuries that a person can commit against another person. Hamartia is an injury committed in ignorance (when the person affected or the results are not what the agent supposed they were).
The credit crunch is a tragedy. A tragedy for those that have lost their jobs while blameless (I’m not thinking of Jimmy Cayne here); a tragedy for those that were conned into a mortgage they cannot afford; perhaps even a tragedy for investors who lost a fortune because they believed ratings agency due diligence. There’s lots of Hamartia: a belief in the robustness of risk transfer via securitisation and conduits; a belief that you know what the CDRs will be on mortgage pools; various kind of mis-selling and representations that were either knowingly or unknowingly false.
Then we had a series of moments of Anagnorisis: the initial falls in the prices of mezz then AAA ABS; the wave of announcements of write-downs; the distress of the monolines and the implications of that for the muni markets; conduit and SIV failures; Libor spikes and central bank interventions; rising delinquencies.
Let us take a moment then to mourn a tragedy,-for that is not too extravagant a word,-to hope that at least lessons can be learnt, lives mended, a better equilibrium attained.
Does this make sense? May 6, 2008 at 3:45 pm
Bloomberg reports a miserable quarter for Fannie Mae:
Fannie Mae, the largest U.S. mortgage- finance company, reported a wider loss than analysts estimated, cut its dividend and said it will raise $6 billion in capital
The $2.19B, while eye catching, isn’t the real story. For that let us turn to the New York Times:
As home prices continue their free fall and banks shy away from lending, Washington officials have increasingly relied on two giant mortgage companies — Fannie Mae and Freddie Mac — to keep the housing market afloat.But with mortgage defaults and foreclosures rising, Bush administration officials, regulators and lawmakers are nervously asking whether these two companies, would-be saviors of the housing market, will soon need saving themselves.
Remember Fannie and Freddie are not regulated as banks. They would be capitally inadequate if they were as their leverage is frightening: a combined $83B of capital vs. $5T of debt according to the NYT. Instead they have the Office of Federal Housing Enterprise Oversight, which has consistently acted as their cheerleader. With losses rising politicians are beginning to worry:
“They are on real thin ice financially,” said Senator Richard C. Shelby of Alabama, the senior Republican on the Banking Committee. “And the way the law is written right now, there is very little we can do to correct that.”
The real issue is how these entities came to be in the first place. Their debt is viewed as government guaranteed (although that is not explicit). Yet they have shareholders. In addition to not bearing the weight of Basel, they have preferential tax status and are exempt from many SEC securities regulations. But they are hardly government pawns:
“We have to bow and scrape and haggle each time we need help,” said a senior Republican Senate assistant who spoke only on the condition of anonymity [...]In a March meeting, Freddie Mac’s chairman, Richard F. Syron, bolstered those fears by saying the company would put shareholders’ interests first.
This is clearly bizarre. Either regulate them as banks and let the shareholders keep their stakes or nationalise them and have them act in the interest of the state. Privatised gains and socialised losses is not a good compromise.
Update. Talk about putting out the fire with gasoline. The Office of Federal Housing Enterprise Oversight has just said that it will lower requirements for surplus capital at the agencies to 15% from 20%, allowing the agencies to increase their leverage yet further. This might help the mortgage market in the short term but the US tax payer will be left holding the baby. S&P already thinks this is a trillion dollar problem. In the immortal words of Homer Simpson, shimatta-baka-ni.
Further Update. The FT reports that Fannie is planning a $5.5B capital raising. Too little, too late.
Off off B/S : good optics May 2, 2008 at 9:03 am
From the often amusing Long or Short Capital:
The latest credit product is the new OFF-off-balance sheet provided by Private Equity Shop Y and Hedge Fund X. In exchange for below market financing, loose structural terms, and a 10-20% down payment, the off-off-balance sheet structure is designed to take an undiversified smorgasborg of the bank’s very own hung deals fresh from the bank’s books.
Recommendation: Being that off-off is a double negative, we think that maybe, just maybe, that selling loan assets to highly leveraged entities to which you provide the financing is more of a shell game than a credible solution.
Which is not to say that in terms of the optics, the accounting, and the regulatory capital it doesn’t work really well. It’s just the actual risk transfer part that’s the issue.
Hybrid thoughts April 27, 2008 at 8:47 am
Hybrids are hot. Many banks have opted to use securities falling between senior debt and common stock to bolster their balance sheets. We have seen both perpetual and dated prefs, mandatory convertibles, optional convertibles, and much else besides. As the FT points out, the use of hybrids avoids dilution to common stockholders, at least for now. Let them take up the story:
But credit ratings analysts believe that the surge in issuance could increase risks for bondholders and other investors and weaken the long-term health of banks’ balance sheets.
Last week, Moody’s warned it might downgrade the credit rating of Merrill Lynch, which recently raised $2.5bn in preferred shares, unless the bank reduced the percentage of hybrid securities on its balance sheet.
Just this month, banks including Merrill, Citigroup, JPMorgan Chase and Lehman Brothers have issued about $18bn in preferred shares – more than the total issued for the whole of 2006.
This year’s issuance of preferred shares by US companies is on course to exceed the record $52.6bn touched last year, according to figures from Dealogic.
Ratings agencies usually want companies to have less than 25-30 per cent of their total capital in hybrid securities. But the latest bout of issuance has pushed some banks above that limit. At Merrill, for example, hybrid securities account for more than 44 per cent of total capital, according to estimates by Sanford Bernstein analyst Brad Hintz. Merrill declined to comment.
Analysts say that less sophisticated retail investors are attracted to the high interest rates offered by preferred shares and are less aware of provisions allowing companies in later years to exchange them for ordinary shares with no interest. “Firms achieve better prices selling to retail than they ever could get by selling in the institutional community,” Mr Hintz said.
So they are cheap and common stockholders like them. Are they any good?
The problem is that it is hard to say. Structurally hybrids have features that make them equity-like: the ability to defer coupons, subordination, eventual conversion into equity, long life; all of these help to give the hybrid some loss absorption capability. However in practice this flexibility is rarely used. Issuers do not defer their coupons and perpetual securities are not just usually callable: they are usually called.
One insight into the real utility of hybrids is given by banks’ economic capital calculations. They are permitted to use a certain percentage of hybrids to meet regulatory capital requirements (aka ‘non-core Tier 1′ and ‘Tier 2′). But for economic capital banks can assess both the capital required and the capital available however they choose. There is a great diversity of models for the calculation of economic capital requirements as a result. However there is little diversity in how those capital requirements are met: banks overwhelmingly take no credit for hybrids in their assessment of available economic capital. Telling, that.
Ambac posts a $1.6B Q1 loss April 23, 2008 at 2:29 pm
From Bloomberg:
The first-quarter net loss was $1.66 billion, or $11.69 a share, New York-based Ambac said today in a statement.
That is over 10% of their claims paying ability (as stated in the 2007 annual report) in one hit.
Ambac fell as much as 22 percent in early New York Stock Exchange trading as new business slumped 87 percent after states and municipalities shunned its insurance and the market for mortgage securities dried up.
Looking into the detail, we find two major components of the loss: $1.7B mark to market loss on written credit derivatives held at fair value (primarily CDOs of ABS), and a $1B increase in reserving for written financial guarantees on RMBS accounted for as insurance. What I would really like to know is the balance of Ambac’s subprime risk taken via CDS vs. that taken financial guarantees. In other words, how does Ambac’s fair value write-down compare with its reserves? If $100M of ‘average’ (whatever that means) exposure taken via CDS generated $20M of write-down, say, how much did Ambac increase its reserves for $100M of average exposure taken via writing financial guarantees?
If things keep on going down like this it is going to get very messy. Still, at least Bill Ackman had a good day.
Update. Meanwhile other market participants old (FSA) and new are queueing to eat Ambac and MBIA’s lunch. The FT reports:
Two companies are considering opening new bond insurance firms – a large US bank and a large private equity firm – according to New York’s insurance industry regulator.
Finally, Calculated Risk has a post on adverse selection in the monoline’s portfolio: see also slides 31 & 32 of Ambac’s Q1 presentation. I’m not sure what exactly if anything one can conclude from the information, but it is interesting.
Why the long ABS? April 20, 2008 at 7:16 am
Gillian Tett comments on the large supersenior ABS holdings at Merrill and UBS in the FT backed by mortgages on properties like the fine abode above:
Most notably, as these banks have pumped out CDOs, they have been selling the other tranches of debt to outside investors – while retaining the super-senior piece on their books. Sometimes they did this simply to keep the CDO machine running
Absolutely. And also as a funding arbitrage: for a bank that funds at Libor flat and views supersenior as risk free supersenior paying Libor plus ten is a good investment. Tett continues:
[Since] super-senior debt carried the AAA tag, banks were only required to post a wafer-thin sliver of capital against these assets
Again true, but I doubt that the advantageous reg. cap. position of these assets was that important. Any low volatility bond would do in a VAR setting, or any internally highly rated one under Basel 2 in the banking book. And there are plenty of AAAs that yield more than Libor plus ten. The real issue is the risk assessment: some banks managed to persuade themselves this paper was risk free. And that brings us nicely to an article in the WSJ on how exactly the firm got to that assessment. Enjoy.
Yesterday’s Basel press release April 17, 2008 at 8:08 am
On Wednesday the Basel committee announced some changes to the Basel II framework. The press release is fairly short on detail, but it does give some insight into the forthcoming detailed proposals. Let’s take a look.
The Committee reiterates the importance of implementing the Basel II framework.
This is shorthand for ‘please Mr. Fed would you implement our Accord?’
…the Committee will revise the Framework to establish higher capital requirements for certain complex structured credit products, such as so called “resecuritisations” or CDOs of ABS.
Clearly CDO squared products and CDOs of tranched ABS have been a major issue so this is reasonable. But CDOs of pass throughs have much less model risk and behave in a much smoother fashion so I hope these will not be tarred with the same brush.
It will strengthen the capital treatment of liquidity facilities extended to off balance sheet vehicles such as ABCP conduits.
The issue here is implicit support: legally many of these lines were low risk, but reputational concerns forced banks to provide support where it was not contractually required. Rather than charging for liquidity, which will simply encourage the use of non-bank liquidity providers, the committee should cap the benefit available for securitisation.
The Committee will strengthen capital requirements in the trading book… The Committee … is extending the scope of its existing proposal guidelines for “incremental default risk” to include other potential event risks in the trading book … (planned 2010).
This is so frustrating. The capital requirements in the trading book are already high compared with the banking book, and the incremental default risk proposals are hardly a model of cogency or risk sensitivity. If the trading book charges are imprudent then the banking book ones are far too low. They should also be revising the correlations in the IRB formula and increasing the risk weights for risk below BBB- in the revised standardised approach. And surely they can get their act together a little faster than 2010?
The Committee will monitor Basel II minimum capital requirements … over the credit cycle… [and] will take appropriate measures to help ensure Basel II provides a sound capital framework
So no discussion of procyclicality and no acknowledgement of the need for anti-cyclical capital requirements especially for fair value assets. This is disappointing. Basel II seems to have become a self-sustaining industry where wholescale change is almost impossible. The extended timeframes and modest revisions are evidence that major regulatory change will need more impetus than just the biggest banking crisis in a generation.
In July the Committee will publish for consultation global sound practice standards for the management and supervision of liquidity risks.
What about capital for liqudity risk?
Weaknesses in … valuation practices for complex products have contributed to the build-up of concentrations in illiquid structured credit products and the undermining of confidence in the banking sector. The Committee is taking concrete action to promote stronger industry practices in this area.
What pray might those be? If it doesn’t trade, it isn’t Level 1. Stronger practices whatever they may be need to acknowledge that fair value is often an estimate and that uncertainty in valuation will always be with us. This is fundamentally an investor education problem: equity holders suffer the same realised earnings volatility whether the asset is fair value accounted or not; hiding that volatility via loan loss provisions in the banking book just turns the spotlight away, it does nothing about the real risk. Supervisors seem to be aware of the issues with structured credit in a fair value context but reluctant to acknowledge that these risks are still there in an accrual context, just concealed by the accounting.
Are these changes going to help? A little, although putting a charity slot in the wall of the BIS might be more effective: there is much more that needs to be done, and done quickly.
Surviving Gatwick North April 13, 2008 at 12:28 pm
If you are ever stuck in the noisy, dirty hell that is Gatwick North and are faced with a queue of 50 people just to buy a cup of coffee, make your way towards Gates 101-114. You will ascend over a spectacular bridge, then find yourself in a quieter waiting area with a much less busy cafe. Of course you might well have to make your way back when it is time to go to your gate, but waiting in this satelite is a good deal less nasty than in shopping centre that is the main hall, at least until the government has the balls to renationalise BAA.
The backlash continues April 8, 2008 at 9:40 am
Commenting on the Paulson proposals for overhaul of the US system of financial regulation, I said:
I still think the political battles will be prolonged, that they are likely to result in watering down of even these fairly modest proposals, and that this is not nearly enough.
The next round of those battles has started. Bloomberg reports:
Three former leaders of the U.S. Securities and Exchange Commission say the Bush administration’s proposed overhaul of financial regulation threatens to weaken the agency, a process that may already be under way with help from the SEC itself.
David Ruder, Arthur Levitt and William Donaldson, all former SEC chairmen, said a Treasury Department push for the agency to adopt the regulatory approach of the much smaller Commodity Futures Trading Commission would be a mistake.
It’s “not useful” for the SEC to have “a prudential-based attitude in which regulators solve problems by discussing them informally with market participants and ask them to change,” Ruder, a Republican SEC chairman under President Ronald Reagan, said in an interview. “We have to have an enforcement approach.”
Levitt, who led the SEC from 1993 to 2001 under President Bill Clinton and who supports an SEC and CFTC merger, says the terms proposed by Treasury are “wrongheaded” because they would give the trading commission “primacy.”
SEC Chairman Christopher Cox, 55, hasn’t endorsed a merger between the two agencies, said SEC spokesman John Nester. “He would insist on a system of oversight that best protects investors, promotes fair markets and facilitates capital formation.”
Culture wars are inevitable in any merger. Personally I think an old style SEC (rather than the watered down current version) made for an effective conduct of business regulator.
Its regulatory capital regime is, however, badly flawed and potentially imprudent, and taking that aspect away from the SEC would make a lot of sense. Presumably none of this is going to happen before Bush departs so the wars will last a while. So talking of old conflicts, here is the church which currently occupies the site where Joan of Arc died.
JPM can’t bear the Bear… April 5, 2008 at 12:32 pm
…or at least its assets. They have asked for and received from the FED two waivers:
- One on affiliate exposure between them and the acquisition vehicle (which seems reasonable); and
- One on calculating regulatory capital on the Bear’s risk weighted assets.
Specifically they can exclude risk weighted assets which came from the Bear for eighteen months in their total risk weighted assets calculation up to a total cap which starts at $220B and decreases by $36.6B (a sixth) every quarter. They can also exclude these assets in their Tier 1 calculation, this time with a straight line amortising cap initially set at $400B.
I asked earlier in a discussion of the small amount of capital the Bear had what capital it would have required had it been regulated as a bank. It seems in the light of the above that we will not find out the answer to this. I find this disturbing. For the FED to grant this exemption with the size of the issue being public is one thing. For them to keep the size of the exemption secret is entirely different and much more worrying. How can the market possibly understand JPM’s real leverage without knowing what their true capital adequacy is? At very least the FED ought to require JPM to calculate and disclose their total capital and tier 1 ratios both with and without the Bear’s RWAs every quarter.
Under Basel 2 there is no easy way of estimating the size of the problem. Lacking any detail the best we can do is a Basel 1 estimate, which would suggest that the waiver is worth $16B of Tier 1 (8% x $400B x 50% since 50% of capital requirements have to be supported by Tier 1) and $8.8B of Tier 2Assuming a 15% cost of Tier 1 and 10% for Tier 2, that is worth $3.2B a year. That’s a nice exemption for JP, and scant crumbs for the rest of us.
Capital: breaking the cycle April 2, 2008 at 11:50 am
One possible counter to the problem of procyclical leverage I discussed earlier is countercylical capital requirements. Willem Buiter discusses these in his FT blog, and makes a few interesting suggestions.
1. Regulatory capital adequacy requirements should apply to all highly leveraged financial institutions. Just to get around the obvious wheeze of the treasury department of a bicycle manufacturer being turned into a de-facto financial intermediary, the capital adequacy requirements should be applied to any highly leveraged institutions, whatever its label.
Hmmm. This is slightly problematic because some of these firms, perhaps most of them by number, neither have deposit insurance nor pose systemic risk. Imposing capital requirements on smaller firms reduces the diversity of the financial system and encourages larger firms. I cannot see a fair way of shading between large/systemically risky/should have capital and small/systemically not risky/does not need capital, but certainly applying capital to everyone is not necessarily the best way of ensuring financial stability.
2. Regulatory capital adequacy requirements should be counter-cyclical – they should be raised (by the central bank) during periods of boom and lowered during periods of bust. This will also help remedy one of the problems with the Basel I and II Accords.
Absolutely. And the mechanism to do this is available under Pillar 2. FSA could easily, for instance, have cycle-dependent trigger and target ratios. This is possibly the single most important policy change we need.
3. There should be regulatory leverage ceiling for all highly leveraged institutions. This ceiling should again be varied countercyclically by the central bank: the ceiling will be lower during booms and higher during busts.
If regulatory capital makes sense then this will happen anyway under 2. One important issue is that at the moment off balance sheet leverage is not captured by capital: if you fix that and a few other loopholes, then 2. should imply 3.
4. There should be regulatory maximum liquidity ratios (say ratio of liquid assets net of liquid liabilities to total assets) for all HLIs. This ratio should again be varied countercyclically by the central bank.
Yes, but the devil is in the detail in defining liquidity ratios. For instance backup CP lines were thought to be very low risk until the crunch. Preventing arbitrage of these rules will need careful initial drafting and then regular review to ensure they remain relevant.
5. Maximum loan-to-value ratios for all collateralised borrowing (including mortgages). Again, these ceilings should be raised during a slump and lowered during a boom.
An excellent idea, although these LTVs will have to be asset class specific, and figuring out how to change them in a prudent manner will also require a lot of work. Step function changes might be problematic, so finding a function of macroeconomic variables which automatically determines today’s (or at least this month’s) maxLTV is important.
[...] My examples are not meant to be exhaustive, just illustrative. They share the feature that they don’t have Fed staff crawling through the darkened corridors of investment banks at night. They require verification that the various credit ceilings are respected, of course. But the ceilings themselves are varied according to macroeconomic conditions, not firm-specific circumstances.
Why wouldn’t you want the FED crawling through the banks at night, or indeed during the day? In particular, how can you ensure that a firm is doing the above correctly without supervision? The contract should be If you are a financial institution that either poses systemic risk, or can draw on central bank liquidity, or offers a product that is government insured (such as a bank deposit or certain kinds of insurance) then you have regulatory capital requirements and you are supervised.
Thank you, Dealbreaker.com, for the following moral failing on my part… November 30, 2007 at 8:49 pm
There is no excuse for the following link. None. I feel guilty even having read this article, let alone laughed at it. But to heck with it, I’m on holiday for a week
Meanwhile 
Enjoy, and there will be more when I get back.
The Centre of Power September 17, 2007 at 1:17 pm
Depending on exactly how you calculate it, the geographical centre of the UK is somewhere round Accrington in Lancashire. On the other hand, the political centre is London. As I was coming back into the capital on Sunday night, the idiocy of this came home to me. The entire South East is crowded, its infrastructure is straining, and it attracts a disproportionate amount of attention and resources. So let’s move parliament and the major government departments to somewhere more representative. Accrington, say. I’m sure a nice big brownfield site could be found to re-develop, and the boost to the local economy (currently suffering from the decline of manufacturing) would be huge. Think of the opportunities for journalists, restaurants, pubs, and of course high class courtesans.
Meanwhile down South valuable land would be freed up, the exodus of people would depress housing prices, relieve some of the pressure on the South East’s straining transport system, and most importantly of all refocus the government on the needs of the whole of the UK rather than just the parochial concerns of the South East. Admittedly administrative capitals that are not a major population centres tend to be pretty boring places — think of Canberra, Ottawa, or Bonn pre 1999 — but imagine the burst in artistic creativity once all those policy wonks, lobbyists and other government types aren’t dragging down London’s atmosphere. Blackburn and Burnley haven’t got much of a scene to ruin either. We could keep the House of Commons as a tourist venue: it would make a fantastic museum. Surely the opportunity to knock down the Ministry of Defence, a building of positively Stalinist ugliness, is enough to wave the decision through by itself?
Winning Hearts and Minds March 10, 2007 at 5:41 pm
I’m not sure if these are Banksy’s tribute to the death of Baudrillard, but they have recently appeared on a wall close to my flat.
The resolution wars July 2, 2006 at 10:00 pm
Digital cameras are not high enough resolution yet. What, I hear you cry, you can buy 12MP for under a grand now. Well, yes, you can. But that’s not enough. The problem is that this particular game is set up for standard sized photographs. 5 inches by 7, say, or perhaps a little larger. Big in this context is A4 sized. And that’s fair enough. But I want to put my pictures on the wall, so 20 inches by 30 is a minimum. A decent printer gives 360 dots per inch, but let’s be charitable and call it 200. Then 20 inches is 4000 pixels and 30 is 6000 so 20 x 30 is 24MP. And remember that’s a minimum. Ideally I’d like to be able to crop that image a little, and print it larger. So really 50MP is a sensible resolution to aim for. It might be a while before I buy a digital camera…
When an example is not exemplary April 12, 2006 at 3:55 pm
There is a blog I sometimes read, The Tao of digital photography. Recently it has featured 10 pictures which were important to the author’s development of an aesthetics of photography, or Ten Epiphanous Photographs as he calls them.
What’s interesting about this selection (apart from the photographs themselves) is how badly they come off from the blog format. André Kertész in real life is impressively sharp, well composed, atmospheric. Reduced to 200×160 pixels, it looks trivial, throw away, even whimsical. And if the author had chosen fine art photography in the tradition of the Bechers (like Gursky, or Struth, or Ruff, or possibly worst of all for easy reproducibility, Elger Esser), things would work even less well. This lead me to ponder how far the digital medium has to go in resolution terms. A good print at 3 feet by 2 has at least 300 pixels per inch, or roughly 10,000 by 7200. That’s 72M pixels or over 2000 times more than the blog picture. For the Gurskys and such, they might easily be three times bigger in linear dimension, so the problem is ten times worse. Processing power might have increased by many orders of magnitude since the sixties, but display technology has not got more than a thousand times better. There’s a way to go yet.
When the technology is more artistic than you are April 5, 2006 at 5:08 pm
Look what happens when my mobile phone’s camera gets over- loaded by being pointed straight at the sun – I particularly like the purple halo around the black sun. This kind of objet trouvé has a long and glorious history, of course, going back at least to Duchamp, but it is still nice when it happens.
Bigger and better? March 20, 2006 at 5:54 pm
I have just got a new display for my computer, a deliciously big, high res LCD panel. And there’s just one problem, a problem I didn’t anticipate. My pictures don’t look nearly as good on it. It’s the resolution. At 1024×768, my old resolution, it’s easy to find a nice looking desktop, for instance. But there isn’t much available at 1920×1200, and the old stuff just doesn’t look very good blown up to fill the new screen. So, gentle reader, be warned, your new display might very well make your old pictures look terrible, which might not be quite why you bought it.
