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 of that [...]
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: design a [...]
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, at least for [...]
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 [...]
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 can be suggested [...]
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 value. Indeed [...]
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 [...]
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 [...]
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 risk [...]
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 and Market [...]
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 [...]
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, ways [...]
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 419 basis [...]
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 would have [...]
…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 less [...]
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 [...]
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 [...]
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 on subsequent [...]
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 [...]
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 [...]
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 and observe [...]
Bloomberg has an interesting article on Goldman which again highlights the preferential capital position of the US broker/dealers vs. the banks. Less than 48 hours after a government-backed deal rescued Bear Stearns Cos. from bankruptcy, David Viniar, Goldman Sachs Group Inc.’s chief financial officer, was asked if the crisis would have “permanent implications” for Wall [...]
