Reputation risk and SIV sponsors

This bridge is well known: it’s in Newcastle, and if it fell down, it would have a reputational impact on the city. What you build reflects on you: well, if it’s beautiful; badly if it’s ugly and it fails. This brings us nicely to structured investment vehicles or SIVs. (This or this are not too […]

Liquidity Dynamics

Three pieces of recent news seem interlinked. Barclays used the Bank of England window to buy in liquidity at a penal rate. The president of Moody’s thinks that what we’re experiencing is an extreme lack of confidence and lack of liquidity. I have never seen this before. And the CP market is still shrinking. This […]

It’s all about funding baby

From the FT: Standard & Poor’s issued a string of downgrades and negative watch notices on a number of SIV-lite programmes late on Tuesday night. SIV-lites, a type of collateralised debt obligation that rely on short-term commercial paper to fund senior debt, have come under intense pressure due to falling values in their investments combined […]

Godot waits for the close.

Vladimir: Subprime? Estragon: Subprime. Vladimir: Slime. Estragon: Triple A. Vladimir: Exposure? Estragon: Exposed. Vladimir: Leveraged. Estragon: Leveraged and Funded. Vladimir: Funded? Estragon: Roll coming up. Vladimir: Roll that CP. Estragon: CP? Vladimir: ABCP. Estragon: The End. (Inspired by Long or Short Capital.)

Liquidity Markets

Caroline Baum writing for Bloomberg points out that Bernanke of the FED is an expert on the Great Depression: Bernanke [...] wrote in a 1983 paper for the National Bureau of Economic Research (“Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression”): [...] “the financial crisis of 1930-33 affected the macroeconomy […]

There is no risk

Well not quite. But here’s the thing. Roubini Economics Monitor discusses the distinction between risk (in his terms variability in outcomes that can be estimated statistically) and uncertainty (unknown or unmeasurable outcomes). The basic idea in this article is that risk can be priced but uncertainty can’t: Economists distinguish between “Risk” and “Uncertainty”: the former […]

Rational Default

(R.I.P. subprime, alt-A, negative am hybrid arms and all those other delightful mortgage market innovations.) Over on Calculated Risk, Tanta discusses the behaviour of U.S. home owners given the availability of negative amortisation mortgages. (Essentially an option ARM had very low initial payments, so you could buy a large house with one of these even […]

Quantitative Hedonics

I’ll start with an effective way to create hap- piness. Lays’ ketchup flavour crisps and Mouton Rothschild 1985. Yes, I know it sounds like a strange combination but it actually really works. So, if that is practical hedonics, what’s quantitative hedonics? Economists are starting to broaden the idea of cost, in particular talking about the […]

On days like this…

…with monsters stalking the market it is nice to be long gamma. You have to call current CDS levels on the big 3 broker dealers is an opportunity to sell protection at nice wide levels too…