Thank you,, for the following moral failing on my part…

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 carry trade old and new

The old version. Borrow in yen at low interest rates, convert in the spot market to dollars, buy dollar assets, and bet that the yen won’t strengthen so much that the dollar profits are wiped out by FX losses. It worked fairly well, on average, from 1995 to 2006 or so, partly due to structural […]

Filling the black hole

Earnings are contracting. The government is in trouble. How are they going to fill the hole created by a declining tax take without making themselves even more unpopular? Easy. Cancel ID cards. Saving £18B. Cancel the Trident replacement. Saving £76B. Withdraw from Iraq and using the savings to equip the troops in Afghanistan properly. That […]

Free speech

The whole point about free speech is that it applies to people you disagree with too. If you are not inciting the audience to violence or hatred, then you should be allowed to speak. (No one is obliged to listen, after all.) The whole brouhaha about the Oxford Union’s invitation to a couple of unsavoury […]

Wot no liquidity?

The FT announced: Fresh emergency action to pump funds into the money markets was announced on Friday night by the European Central Bank amid renewed fears that liquidity in the credit markets is again starting to dry up. This is beyond a short term hickup. It will change how Banks view liquidity risk going forward […]

The effect of the subprime squeeze on prime lending

Over at Calculated Risk, Tanta makes a very good point about the dramatic decrease of subprime capacity: The main impact of subprime lending on the overall mortgage business was the take-out function. As subprime lending grew, you saw better “performance” of prime or near-prime mortgage portfolios. This was not because subprime lending did away with […]

Is this problematic?

Consider the following capital structure: Security assets, chiefly RMBS: $700B Unpaid principal balances on securities issued, mostly covered bonds (i.e. RMBS with a guarantee from the issuer): $1.5T Total stockholder’s equity: $25B Anyone spot a teensy weensy leverage issue here? And a single concentrated risk factor perhaps? Add in a Q3 2007 loss of $2B […]

Friday in the crunch with George

The crunch is getting crisper if not more chocolatey. Currently suffering are: The monolines. CIFG for instance is about to get a capital injection according to the WSJ. Now would be a great time to set up a new monoline, writing pure muni business. Perhaps Warren will help? Any bank relying on the securitisation market […]

Liquidity puts

It seems from FT alphaville that liquidity puts are not that well known. Here’s the gig. In any structure where a vehicle issues paper backed only by collateral (such as a SIV, conduit or securitisation) but where the paper has a shorter duration than the collateral, there is liquidity risk: if no one buys the […]

Timing risk and finite reinsurance

One of the murkier parts of the reinsurance world is finite reinsurance. Even finding a good definition is difficult. But here, rather than surveying the whole topic, I want to discuss one particular application, namely hedging timing risk. The typical situation this arises is where there either may or will certainly be claims on an […]

Having your cake and eating it

The news that bids for Northern Rock are considerably below the current share price is hardly surprising but it does remind us that equity is a residual interest. It only has value if the firm can pay its debt in a timely fashion. Every so often shareholders forget that. Then when a firm fails, they […]

The economic value of a leader

Some tedious blogger who I won’t glorify with a link challenged Paul Krugman to admit that Mrs. Thatcher was ‘good for the UK economy’. That made me wonder how you would tell. At first it doesn’t seem difficult: there are a number of indicators of which perhaps GDP is the most obvious, and Thatcher the […]

Yes my CPDO is burnt

Completely predictable news of the week from the FT: Moody’s […] said on Monday that eight financial-company focused constant proportion debt obligations (CPDOs), most of which are currently rated AAA, had been put on review after their net asset values had been hurt by credit-market volatility. […] Two of the deals facing downgrades are from […]

Spread wide

Friday market update: from Bloomberg, we learn that Merrill’s 6.4 percent notes due in 2017 pay a spread of 2.24 percentage points, almost double the premium of 1.21 percentage points a month earlier Meanwhile Citigroup paid 1.90 percentage points more than Treasuries of similar maturity to sell $4 billion of 10-year notes on Nov. 14 […]

Credit support default: delivering quality collateral

Most OTC derivatives are done under ISDA documentation. Included in the typical package (master, confirm, definitions, schedule) is the CSA or credit support annex. This specifies what kinds of credit support, if any, each party to the contract has to give to the other. Commonly, for instance, the CSA might say (lawyerese for) ‘each of […]

Buying a broker

Should any of the large European banks seriously consider buying a Wall Street investment bank? Matthew Lynn at Bloomberg thinks so, arguing that Lehman, the Bear and Morgan Stanley are easily affordable by banks like Deutsche, Santander or HSBC. He has one delightfully acid little dig: […] it is very hard to understand what Royal […]

What should capital requirements be like?

I don’t think the answer to the title question is clear. But some desireable criteria are becoming apparent. I suggest: At any point in time, larger risk should imply larger capital, i.e. there should be portfolio risk sensitivity. Overall, market wide changes in risk premiums (and in particular market crises) should not change capital requirements. […]

Level 3 and default correlation

Suppose you take a collection of assets of known price and put them into an SPV. The SPV issues tranched debt. Obviously the sum of the values of the tranches equals the sum of the values of the original assets (unless there is some external credit enhancement for the SPV which adds value, or some […]

Wile, Gisele, and the dollar

It was always going to take one more push to get the dollar into that Wile E. slide. Perhaps the news from Gisele was it? Here (from via Calculated Risk) is the recent action on the U.S. dollar index Dec futuresI trust regular readers will be impressed by my restraint in not using the […]

Too friendly?

An article in the New York Times raises one of those issues that is unmentionable in most company – do companies discriminate against the childless? A moment’s thought indicates that most of them do: think of maternity and paternity leave or staff leaving early or arriving late because their child is ill or for a […]