On Wednesday HBOS closed the first UK RMBS deal since August 2007 (that we know about, anyway). Libor + 85 for AAA bonds with a 160% OC. Yep, the deal is £500M and there is £800M of collateral. 800. Just pause a moment and think about that OC. The deal can suffer 35% delinquencies with [...]
From Bloomberg: JPMorgan Chase & Co. won approval of its purchase of Bear Stearns Cos., shuttering an 85-year-old firm whose collapse ranks along with Drexel Burnham Lambert as one of the biggest in Wall Street history…Bear Stearns shareholders endorsed the sale during a 10- minute meeting today Don’t say a prayer for me now, save [...]
Suppose you have a decision to make and you know some quantitative finance. How can you use what you know to help in your decision? First you construct a outcome metric. This is just a function that expresses whether one distribution of outcomes is better or worse than another. Next you deduce the distribution of [...]
More on my reading backlog: I’ve been tackling Minsky’s Cushions of Safety: Systemic Risk and the Crisis in the U.S. Subprime Mortgage Market which compares the old-style model of financial system fragility with the happenings in the subprime crisis. What I had not realised is that Minsky’s notion of fragility is just a form of [...]
A key issue in strategy is uncertainty in the outcome. Unlike financial return distributions, where we at least have some data to go on, and some models (albeit ones which struggle with autocorrelation, fat tails, and regime changes) there isn’t much data on corporate strategy because each situation is different. I can’t try the same [...]
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 [...]
I am convinced that there will be a good buying opportunity for financials at some point in the Crunch. Has it arrived? It would be a brave person who was certain it had, and events of the last few weeks are curious. Consider (courtesy of Bloomberg) first two of the hardest hit large broker/dealers, Merrill [...]
Of financial statements that is. The IIF has recently pleaded for more laxity in applying fair value accounting in disrupted markets. Specifically they want banks to be permitted to use book value where it suits them, but not to be locked into hold to maturity if they do that. As Lex says: However diplomatically couched, [...]
From the FASB: Statement 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. Specifically, from the standard itself: The recognition approach for a claim liability relating to a financial guarantee insurance contract [...]
Jean-Claude Trichet made a speech in 2005 on Asset Price Bubbles and Monetary Policy. The full text is here. A few points leap out at me. Firstly Trichet raises the question as to whether there is such a thing as an asset price bubble: I believe the NASDAQ valuation of the late 1990s was not [...]
Continuing our occasional series, more pictures of retail housing gloom. First from Big Picture, house prices And unsold inventory Calculated Risk likes to look at Sales vs. Inventory normalised by the number of owner occupied units. This gives a sense of the percentage of unsold inventory and the percentage turnover: They argue that since turnover [...]
On Monday I said: The combination of leverage and complexity is a massive concentrator of model risk By Wednesday we find in the FT: Moody’s awarded incorrect triple-A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models…after a computer coding error was corrected, [...]
…apparently. According to Reuters: The two top members of the U.S. Senate Banking Committee announced on Monday that they have a deal that will create a multi-billion dollar mortgage rescue fund and a new regulator for Fannie Mae and Freddie Mac.
A speech by Jean-Claude Trichet at the International Capital Market Association’s Annual Conference has received considerable comment – see here for instance for Alea. I’d like to focus on just two aspects in a long speech. First, leverage: The challenge lies in preventing the system from feeding on itself through a spiralling process of leveraging… [...]
In the fable of the scorpion and the frog, the frog is surprised that the scorpion’s nature comes out in the dealings between them. The ECB is similarly surprised the banks have arbitraged their rules, despite arbitraging rules being in the very nature of banks. From the FT: The European Central Bank on Thursday voiced [...]
Paul Volcker has cottoned on to the bizarre and currently unhelpful nature of the GSEs I discussed a few days ago — the epitome of privatised gains and socialised losses. From WSJEconBlog via Naked Capitalism: …he questioned the role of government-sponsored enterprises such as Fannie Mae and Freddie Mac during the recent turmoil in mortgage [...]
Two contrasting news headlines drew my attention this morning. Horst Köhler – a former head of the International Monetary Fund – singled out excessive executive pay … as a factor in the subprime crisis and accused bankers of acting irresponsibly according to the FT. And over in New York a Lucien Freud portrait of Sue [...]
This should be below me. But it isn’t. So I’ll point out that hiring a guy called Jerker after you have writen-off $37B seems like an odd move…
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 [...]
Bloomberg reports MBIA had a substantial first quarter loss yet the stock went up: MBIA Inc., the ailing bond insurer, rose in New York Stock Exchange trading after saying it will pump $900 million into its insurance unit and reporting a first-quarter loss that was narrower than some analysts’ estimates. (The $900M is a downstreaming [...]
What should you do when confidence is being lost, when people are starting not to believe you? Gordon has this problem, and for him it is hard to see a way out. He looks inept after the would-he wouldn’t-he election, the climbdown on 10p, and so on. And he hasn’t closed down the obvious vulnerabilities: [...]
A wonderful graphic from the NYT illustrates the US inflation basket. The original interactive version is here: the static version is below. (Click for a larger version.)
Martin Wolf’s blog has some suggestions for improving financial regulation. As usual, quote plus comment: First, coverage. Perhaps the most obvious lesson is the dangers of regulatory arbitrage: if the rules required certain capital requirements, institutions shifted activities into off-balance-sheet vehicles; if rules operated restrictively in one jurisdiction, activities were shifted elsewhere; and if certain [...]
The broker dealers still have laughably generous capital requirements and access to the FED window. But in a step that suggests more of a snore than being full awake to the issues, the SEC is going to make Wall Street investment banks disclose their capital and liquidity levels according to Bloomberg. Not yet of course, [...]
Naked Capitalism has an insightful commentator. I’m not sure if I agree with all of this, but it is certainly a helpful perspective: Perhaps a lesson to be learned here is that liquidity acts as an efficient conductor of risk. It doesn’t make risk go away, but moves it more quickly from one investment sector [...]
Ben Bernanke gave some insight into the pattern of mortgage delinquencies and foreclosures in a recent talk. To begin, here is where the problems have been – the hot spots indicate areas with the biggest changes in delinquencies. Ben suggests three contributing factors. Firstly increasing financial stress on mortgage holders, decreasing the ability to pay. [...]
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 [...]
Warren Buffett’s new monoline is doing well, partly through writing wraps on already wrapped paper. From the FT: Berkshire Hathaway’s fledging bond insurer generated $400m in premiums during the first quarter, outstripping all the established, but troubled, operators in the so-called US monoline insurance market. Many of the 278 contracts the unit wrote were for [...]
The TAF is getting bigger and AAA ABS will be eligible. From the FED: The Federal Reserve announced today an increase in the amounts auctioned to eligible depository institutions under its biweekly Term Auction Facility (TAF) from $50 billion to $75 billion, beginning with the auction on May 5. This increase will bring the amounts [...]
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 [...]
