There seems to be some confusion about exactly what risks the Bank of England is taking in the Special Liquidity Scheme. Here’s my understanding: it is a two way repo of ABS for gilts. Effectively since the gilts are liquid, the ABS is pledged as collateral against a term loan, and the proceeds [...]
The next instalment of the popular computer game Grand Theft Auto is out today (or, for you really hardcore gamers, midnight yesterday). Its launch prompts me to consider how gaming could help finance, beyond the extra carry from all of those copies of the game bought on credit cards. So how about this: [...]
Even S&P think VAR alone is inadequate as a market risk measure. From “Trading Losses At Financial Institutions Underscore Need For Greater Market Risk Capital”:
The securities markets changed dramatically in 2007, shaking the trading businesses of banks and showing up in their risk measurements. The main metric, the aptly named value at risk (VAR), [...]
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, [...]
According to the Guardian:
The Association of British Insurers [...] attacked the way previous corporate failures such as Railtrack have been handled and accuse the government of undermining shareholders’ rights.
However, the investors are particularly concerned about the ability of regulators to take control of a bank’s deposits under the special resolution regime (SRR), the cornerstone of [...]
I have two conjectures for today. The first is that Ambrose Evans-Pritchard needs to drink better Rioja. He presents a bearish blog in the Telegraph, backed by a second class Reserva. I would suggest at least a 904 GR for such musings, and ideally the Murrieta.
Secondly and rather more importantly, it [...]
We are in the middle of a furore about the OTC markets: see for instance here for John Dizard in the FT. Now I can’t argue that the OTC markets are perfect. But just moving an illiquid, hard-to-value contract from OTC to exchange-traded won’t necessarily make it any more liquid or easier to [...]
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 [...]
It is with a heavy heart that I return to the IMF Financial Stability Review. There is an awful lot in chapter 3, and it is worth reading carefully even if on first glance it seems to be forbiddingly dry.
Chapter 3 of the IMF report begins with a fairly stark admission:
The speed and extent [...]
From the Economist via Immobilienblasen. This long term trend in the UK vs. other retail housing markets certainly sheds some light on the BOE Special Liquidity Scheme, although it is worth noting that the incentives to originate bad loans were never anywhere near as bad in the UK as in the US.
Some very quick [...]
The UBS shareholder report on the firm’s subprime losses makes fascinating reading and I will try to return to it later in the week. Meanwhile however it is worth noting that a major cause of the UBS losses were AMPs. Let the report take up the story:
[AMPs] were Super Senior positions where the [...]
Finally my book, Understanding Risk: The Theory and Practice of Financial Risk Management has appeared. Here’s a link for the book’s entry on amazon.
The contents are as follows:
Part One: Risk Management and the Behaviour of Products
Chapter 1 Markets, Risks, and Risk Management in Context
1.1 Financial Markets Overview
1.2 Trading [...]
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. [...]
The Credit Crunch is providing more than enough material for musing on how the rules of a system determine the kinds of behaviour it displays, but just for once I’d like to consider another example: food in France. This blog was named partly in honour of the Italian coffee ’system’, a set of assumptions, [...]
Why is JPM raising new capital? Better commentators than me seem confused, but isn’t it just the Bear portfolio? JPM’s sweetheart deal with the FED amortises over eighteen months and so they need new capital to support the extra Bear assets. And the cost of this capital?
The non-cumulative securities priced to yield [...]
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 [...]
I’m away from my desk at the moment so posting volume is reduced, but I do want to draw attention to an excellent piece by David Roche in the FT. Firstly he points out the importance of non banks to the liquidity of the US financial system:
The Federal Reserve has belatedly recognised that investment [...]
Self-regulation stands in relation to regulation the way self-importance stands in relation to importance
Willem Buiter
There has been some discussion recently of the central banks buying assets such as RMBS rather than simply providing financing for them. Intuitively I am less enamoured of this idea. Some of these assets may indeed represent a screaming buy at current levels, but I find it hard to believe any government body [...]
…to Japan some years ago and now might just possibly be on the cards for the U.S.? Losing their triple A. The WSJ reports:
The performance of government-sponsored enterprises like Fannie Mae and Freddie Mac could have a direct impact on the national economy and, more importantly, U.S. credit standing.
So-called GSEs enjoy implicit government [...]
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 [...]
It is time to look at the blog’s fantasy global macro portfolio.
A short in gold. After a scary moment this came back but now it doesn’t seem to be going anywhere. Take it off: the time will come for this position but it is probably later in the cycle.
Long the iTraxx and short the [...]
Perhaps the most important part of Chapter 2 is a (mitigated) vote of confidence from the IMF in structure finance at the beginning:
Structured finance can be beneficial by allowing risks to be diversified
Before we get into the detail of the IMF report, that comment is worth noting. Now for the ‘but’s, or rather for [...]
I have held off for a couple of days on commenting on this document not least because it is large, dense, and worth reading carefully. There is an awful lot of information in the full text here — the executive summary is here. In this post I will comment on chapter 1: posts [...]
We knew in the abstract this happens, but seeing it in the particular is chastening. From FT alphaville, discussing research from Credit Suisse:
Risk weighted assets and capital ratios under Basel I were relatively static. But that is unlikely to remain the case under the new variant. Risk weighted assets will move with the probability [...]
What is working for hedge funds in the current climate? Bloomberg has a discussion of what isn’t:
Hedge-fund titans James Simons and Stephen Mandel are showing the biggest losses of their careers in the $1.9 trillion industry’s worst start in more than a decade.
Simons’s $18 billion Renaissance Institutional Equities Fund declined 12 percent since its [...]
The FT has a rather alarmist article about ABS valuation. Unsurprisingly to anyone who has been in the market, but a surprise apparently to a regulator was the fact that for some ABS
There was little confidence about how to value the holdings
The wrong conclusion is drawn from this
To an extent, the valuation problem for [...]
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. [...]
It is possible to support the general theme of a body of work without thinking any particular part of it is interesting or successful. Susannah Clapp captures the phenomenon nicely in a Guardian review of the play Contains Violence at the Riverside studios. Here the audience sit on the roof of the theatre [...]
I have written before on the perverse incentive in risk sensitive capital models such as VAR, and on the suboptimal design of the Basel 2 capital accord. Reading a guest post by Avinash Persaud on Willem Buiter’s blog, however, I wondered how much this matters. Let me explain. Persaud rightly points out [...]
From Bloomberg:
Fitch Ratings cut MBIA Inc.’s insurance unit to AA from AAA, saying the bond insurer no longer has enough capital to warrant the top ranking.
MBIA, the world’s largest financial guarantor, would need as much as $3.8 billion more in capital to deserve an AAA, New York-based Fitch said today in a report. The outlook [...]
…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 [...]
The Bear failed for exactly the same reason as Northern Rock it seems. From the FT, reporting Christopher Cox’s testimony to the Senate:
Mr Cox said Bear had been hit by an unprecedented situation in which it had been unable to access liquidity. He said that “what [no] … existing regulatory model has taken into [...]
After the pain comes the recap. Again some of the larger numbers from a table on Bloomberg:
Firm
Capital Raised
Breakdown
Citigroup
30.4
Govt. of Singapore (6.9), Kuwait Investment Authority (5.6), Abu Dhabi Investment Authority (7.5), Public investors (10.4)
UBS
27.2
Govt. of Singapore (10.9), Anon. middle east (2), Public investors (14.8)
IKB Deutsche
13.2 [...]
Reuters: Some homes worth less than their copper pipes
Bloomberg: Stocks rose in Europe and Asia, led by banks and insurers, as investors speculated financial firms will weather credit-market losses.
Does this make sense?
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 [...]
Following yesterday’s writedown and capital raising from UBS, Bloomberg has a very useful summary of the pain so far. Here are the losses which total over $5B: follow the link for the rest.
Firm
Writedown
Credit Loss
Total
UBS
38
[...]
CFTC Commissioner Bart Chilton courageously challenges rogue cop Vic Mackey Treasury Secretary Hank Paulson’s plan. First he lauds the success of the CFTC regime:
Since we began using the more flexible principles-based regulatory regime, the worldwide derivatives sector has increased two-fold. But in the US, it has more than tripled.
Wow, what better measure of regulatory [...]
Apparently Ikea has started to offer a new product using classic Scandi design, BankiRescu. The FED has been taking a few trips over to Elizabeth New Jersey to stock up. From the Telegraph:
A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts [...]
God knows there is enough to tear your hair out for and scream about at the moment. But this made me laugh. From our illustrious Foreign Secretary David Miliband’s blog, via the PM programme:
One foreign minister I met at the informal meeting in Slovenia over the weekend has fallen victim to the Terminal [...]
