I have observed before that the equity markets have not yet reacted as fully as the debt markets to the crisis – and increasingly it looks likely that they will fall further rather than that the debt markets will rise to join them. Goldman is of that mind, and has recently observed that downside vol [...]
A couple of weeks ago I pointed out that while the US institutions have taken their write down medicine, raised new capital, and are busy getting on with trying to figure out what to do next, the Europeans have been much less assiduous in recognising their losses. Now Citigroup, via FT alphaville, comes up with [...]
I have been reading Cassola et al.’s A research perspective on the propagation of the credit market turmoil from the most recent ECB research bulletin. The paper concentrates on information issues in the credit crunch. Here’s how I see matters there. Before the crunch investors had some information on asset prices as many ABS were [...]
Just like these council workers taking down fly posters only for them to reappear in a few days, so banks are getting ABS off balance sheet by offering to finance them. The FT reports one such set of tricks here and Naked Capitalism has a discussion of Lehman’s deleverage using related shenanigans here. The bottom [...]
There is an amusing little game from Forbes here. Here is a summary of the results so far:
Recent articles (see for instance here, here, here, and here) have spurred a concern that I confess should have occurred to me earlier. What can cause an event of default by a monoline, and what happens next. The first issue concerns the effective recovery for ISDA claims against a monoline. Here the crux is the [...]
Am I the only one to think that a more comprehensive solution to the fractured US regulatory landscape is needed than just to increase cooperation and information-sharing between the central bank and [the] SEC as the WSJ reports is in the offing? What about alignment of capital requirements? You need to rebuild the whole building, [...]
… or perhaps not if you are a monoline. Especially a press officer at a monoline. There’s lot’s of steam to generate as this list of current press releases from Bloomberg admirably demonstrates. Oh yes. Long coal, short insurers.
I have been reading a fascinating (if long) article Where Did the Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions by Joseph Mason and Joshua Rosner. There is an awful lot in the document, but here I want to concentrate on one issue they raise which I [...]
The Economist points out an issue: The European Central Bank (ECB), widely praised for providing banks with ample liquidity during the credit crunch, now has a problem: how to encourage banks to place freshly created asset-backed securities (ABS) with investors, rather than dumping them, like so much radioactive waste, in its vaults… On the face [...]
Tom Selling from The Accounting Onion was kind enough to point out his blog to me. Reading a post on FAS 157, it suddenly occurred to me that the implementation the audit firms have permitted of 157 on liabilities, based on the FASB staff position, isn’t consistent with the conceptual framework of 157. The standard [...]
More from the ECB financial stability review. We take up the story with a discussion of the losses in large complex financial institutions: The impact of the sub-prime crisis can be seen in the figures disclosed by banks in their financial statements in two main ways: valuation changes on various assets and increases in credit [...]
Florida and Nevada I can understand but that Michigan/Ohio/Indiana cluster is interesting. My shorthand – if it’s a CSI location it has a mortgage problem – clearly needs to be revised unless CSI New York is renamed to CSI Lansing.
A few more items that interested me from the ECB document discussed earlier. The Turn. The spike in rates over year end is known to interest rate traders as the turn. Look at how it intensified in 2007 vs. earlier years: Country Linkages. A fascinating graphic of the interbank linkages between countries: Delevergage. The change [...]
The most recent ECB financial stability review is a mine of useful information. Here are a few nuggets from the first chapter: more to follow. U.S. Cash out refi. As many people don’t have much equity left in their homes and remortgage conditions are very difficult, cash out refi and 2nd lien financing has fallen [...]
If you are a U.S. residential mortgage consumer and you don’t want a jumbo (and I don’t mean these wonderfully horrible elephants) then the overwhelming likelihood at the moment is that your loan will be funded by a government agency. Freddie and Fannie currently have more than 80% of the mortgage funding market according to [...]
It was obvious in 1999 when the first consultative paper on Basel 2 came out that using ratings as the basic risk assessment tool for regulatory purposes was a mistake. Belatedly it seems that the supervisors have realised their error. From the FT: US regulators on Wednesday raised concerns about their own reliance on the [...]
There has been some talk recently (perhaps inevitably) about the next crisis to hit. Suggestions include: A wave of U.S. Bank failures. According to Reuters: Future U.S. bank failures linked to the downturn in the real estate market may include “institutions of greater size” than in the recent past, Federal Deposit Insurance Corp Chairman Sheila [...]
Whither the CMBX? Specifically, where are the 08-01s going to come from, given that CMBS issuance has plunged along with prices. According to the FT: The amount [of CMBS] issued in the first five months of this year fell 89 per cent to $10.8bn, the lowest level since the late 1990s, according to Commercial Mortgage [...]
In an important case for the structured finance market, Merrill has won a court ruling in its favour in a case against XL. Reuters reports: Security Capital Assurance had said it severed seven credit guarantee contracts with a Merrill unit because the investment bank had given key rights promised to SCA under the contracts to [...]
Goodness was I wrong about MER and LEH vs. GS and MS… Experience sometimes is not cheap at any price.
I suspect that some in the SEC want them for garters right now. His remarks in the FT are sensible, but there is a consolidated supervision humdinger: The institutions that play a central role in money and funding markets – including the main globally active banks and investment banks – need to operate under a [...]
A preliminary version of my article on the causes of the credit crunch can be found here. Comments are most welcome.
That is not quite such a stupid question as it first appears. Consider an industrial corporate. The CDS spread on a company like this reflects were buyers and sellers of credit protection are willing to deal. If the corporate is liquid in the CDS market – roughly 1000 are – then there is typically a [...]
S&P lowered Ambac and MBIA to AA today. They are under review from Moody’s. Fitch, only six months late rather than the year or so of the other two agencies, downgraded them in January. Bill Ackman made another big pot of money. And there’s a nice opportunity opening in zombie monoline runoff…
Clearly there is a lot of money shorting Lehman, and I won’t deny it can’t go down further. But honestly, do you think the Americans will let another broker/dealer fail? They had five big ones before the Bear: now it’s four. Three feels like too few to me, and I suspect both the FED and [...]
Yes, and here’s why. (This example is taken from a paper by Markus Brunnermeier.) Suppose we have a circle of identical interest rate swaps: A B C D and back to A. All parties are fully market risk hedged. B wants to reduce its counterparty risk so it offers to assign A its swap with [...]
Merrill and Lehman were downgraded to single A yesterday: Morgan Stanley is at A+ according to Bloomberg. If only one of them was being downgraded, the news would be catastrophic. As it is, is the new standard for a derivatives counterparty becoming single A? And if not, how will the broker/dealers derivatives business survive?
Yields are attractive. From the FT: US mortgage rates soared last week amid a sharp rise in Treasury market yields, as investors started to bet that inflation pressures could prompt the Federal Reserve to raise interest rates later this year. The sell-off pushed rates on 30-year fixed-rate mortgages to an 11-week high of 6.02 per [...]
The FT reports: International regulators and supervisors have started drawing up plans to make it far more expensive for investment banks to hold large volumes of complex financial instruments, such as mortgage-linked securities, in their trading books… though the Basel rules require banks to hold large capital reserves against the risk of credit default in [...]