Further to yesterday’s post about CB arb, a short note on hedging options.
If you sell an option at an implied vol of v, and the Black-Scholes assumptions hold (in particular the underlying is a diffusion with constant delivered volatility w, and you can trade instantaneously at zero spread) then the expected P/L of a delta [...]
FT alphaville comments on convertible bond arbitrage (in connection with VW, but that need not detain us here). A few points. First the article says CB arb had sizzled out post-2005 due to lack of issuance. Is that really true? I always thought it had sizzled out because CBs were more [...]
I don’t usually post video links, but as it is Halloween and many market participants are white as Zombies…
Margin Revolution has an interesting piece on the TED spread. They take St. Louis FED data on the 3 month T-bill series and 3m Eurodollar deposits (rather than BBA Libor) to get a long term view of the TED spread.
That does put the current travails in perspective slightly.
The VIX opened on Friday 24th at 89.03. What does that mean? Using the root-t rule (which is extremely questionable at the moment, admittedly) that scales to an average daily move of 5.6%. Now admittedly things have been volatile recently. But even taking the period from 6th-24th October, the daily move [...]
From the FED, Information on Principal Accounts of Maiden Lane LLC as at Wednesday, Oct 22, 2008
Net portfolio holdings of Maiden Lane LLC: $26,802M
Outstanding principal amount of loan extended by the Federal Reserve Bank of New York: $28,820M
So the FED is a couple of billion underwater. On October 16th, the assets were valued at [...]
Why, sometimes I’ve believed as many as six impossible things before breakfast said Alice. This quotation came to mind in the discussion of the 30y dollar swap spread in the FT recently:
“Negative swap spreads have been considered by many to be a mathematical impossibility, just like negative probabilities or negative interest rates,” said Fidelio [...]
This, originally from Bloomberg and then picked up by FT alphaville and many others, is attracting a lot of attention:
Despite some rather histrionic claims that it `proves’ the bailout is inadequate and much more money is needed, I am not so sure. For one thing, banks are deleveraging, so they will need less capital. [...]
I have sniped, perhaps too much, at Basel 2. So it only seems reasonable to outline some alternative proposals, particularly as Lord Turner is apparently open to significant change. Here goes.
Scope. Capital charges should apply to assets, derivatives, and to asset/liability mismatch. In particular funding mismatch and the heavy use of [...]
In my defense, I was on a train and running out of reading matter. So another lyric rewrite happened.
New York, occidental settingAnd the city don’t know that the city is gettingThe creme de la creme of the bank worldIn a show with everything but Alan GreenspanTime flies, doesn’t seem a minuteSince the Tirolean spa [...]
Long, long ago, when I was responsible for the valuation of a lot of financial instruments at an investment bank, I used to set a lot of store in valuation adjustments. The basic idea is that the precise fair value of many instruments is uncertain. You value them at your best guess, and [...]
Robert Peston, it seems, may be getting a dose of the scrutiny he has been afforded to the banks. The Observer reported on Sunday that Serious Fraud Office could launch an inquiry into his recent scoops. I don’t have anything against Peston personally, but I do think he has shown a persistent lack [...]
The WSJ has an interview with Anna Schwartz, Friedman’s coauthor on A Monetary History of the United States. She has some interesting remarks.
Today, the banks have a problem on the asset side of their ledgers — “all these exotic securities that the market does not know how to value.”
“Why are they ‘toxic’?” Ms. Schwartz [...]
Finally the tide seems to be turning. Bernanke is talking about the need for central bankers to be mindful of asset price bubbles. Darling is reprioritising spending to produce a classic Keynesian stimulus. But isn’t it bizarre that we now have nationalised banks and privatised railways? If ever there was one [...]
From Reuters:
Credit strategists at ING said on Thursday that credit derivatives were being unfairly blamed by politicians and commentators for the near meltdown of financial markets…”The CDS (credit default swaps) market is being used as a scapegoat for political and economic goals,” ING credit strategist Jeroen van den Broek wrote in a note to investors.
Quite [...]
The first from Clusterstock:
Many of our financial institutions are insolvent. They aren’t healthy victims of bank runs. They are ailing institutions barely kept alive by frantic rounds of capital raising. The lessons of the Great Depression simply don’t apply here.
In fact, we’re probably making things worse. Allowing insolvent institutions to fail and requiring worthless and [...]
Any old bonds? Any old bonds?Any, any, any old bonds?You look neat. Talk about a treat!You look so dapper from your napper to your feet.Dressed in style, brand-new tile,And your father’s old repo on.But I wouldn’t give you tuppence for your old MBS,Old MBS, old MBS.
This is one in a series of bad lyric interventions. [...]
Contrary to the Pet Shop Boys, I came across a cache of old photos, and the markets were often boring. A graphic from the WSJ makes the point well:
It is not the big swings that get you. It is the years and years of returns close to zero. Less than 2% for [...]
I have detected a slightly more sarcastic tone than usual in my recent posts and I had resolved to be nicer. But then something like this comes along:
The Basel Committee/IOSCO Agreement reached in July 2005 contained several improvements to the capital regime for trading book positions. Among the revisions was a new requirement for [...]
I want to talk soon about the equity/credit dislocation I discussed earlier in the year and whether the events of the last few weeks have closed it. But first a few other market datapoints.
First Baltic Dry. This is one interesting indicator of economic activity. Bloomberg shows that the Greenspan Boom [...]
Yesterday, a most propitious day for stocks, the IASB chose to announce that they will permit a new wave of opacity to sweep over company accounts.
Notice that it is retrospective. This is a very negative development if we ever want to get out of this mess. The taxpayer deserves to [...]
On the news at 1, sounding mildly crazed, he said: There was nothing wrong with Northern Rock. No, Tim, nothing but a run that would have led to bankruptcy if the Bank of England had not intervened as Lender of Last Resort. Honestly, these monetarists are so dangerous giving them a media platform [...]
Let me offer an analysis of much of the media coverage of credit derivatives recently.
“Credit derivatives traders eat babies. Now XYZ event will tip the financial system further into chaos thanks to these dastardly instruments…”
(XYZ = Fannie/Freddie credit event, Lehman credit event, …)
“On the eve of the auction for XYZ we spotlight the satanic [...]
From Market Pipeline:
If paying the bankers (a lot) less or taxing them (a lot) would certainly be more desirable from a moral point of view … would it be harmful in terms of economic efficiency, as many economists suggest? Is there a risk of discouraging the most talented to work hard and innovate in finance? [...]
A few desiderata, to assist in the reform process.
Safety, at least for retail deposits. People want to know that their money is safe and available at short notice.
Availability of credit at a fair price. It should be possible for all, individuals and corporates, to borrow at a spread that reflects the risk (in [...]
From the Economist a couple of CDS spreads:
Campbells Soup 17 basis points
United States of America 19.8 basis points
(And Morgan Stanley is over 2000, if you can get it.)
The last time there was this big a market rout, I learned a few lessons.
Vol is really expensive. Sell it around the money. But the wings are dangerous. I like being short vega in this kind of environment, but to get longer on big market falls or rallies.
Whipsaws happen. Live with [...]
FT alphaville is consistently good value, as is The Big Picture. I like Alea and frequently value the insights of IBEX salad and The London Banker. Calculated Risk is OK on real estate (if sometimes misguided away from it) and Paul Krugman is the man in many regards. Long and Short Capital [...]
So WTF is Abbey, part of Banco Santander, doing on the rescue list? Let the Spaniards look after their own problems.
Al is not smart enough for this one, I think, but…
…if you *did* want to get more for the taxpayer in a government bail out of the banking system, you’d leak the fact of a bailout but not confirm it for a day, so stocks fell, and you got more of the bank for your [...]
From Reuters, initial indications for today’s auction:
Fannie
Freddie
Senior
92.4%
93.75%
Sub
92.65%
93.8%
Remember, kids, while senior unsecured recovery can’t be lower than sub in the actual bankruptcy hearings, it surely can in a CDS auction.
Update. Final results in:
Fannie
Freddie
Senior
91.51%
94%
Sub
99.9%
98%
Alea suggests that the recovery mismatch is due to a cheapest to deliver effect as the zeros are deliverable into the senior swaps [...]
In order to save the banking system it was necessary to destroy it.
In Dirk Gently’s Holistic Detective Agency (currently being repeated on Radio 4), Reason is an artificial intelligence program:
“Reason constructs plausible steps to connect any set of unlikely premises to justify any decision.”
“What would you use it for?”
“Anything that would otherwise look like a botched mess of lousy planning by the criminally stupid.”
“Like the current government [...]
I should have thought of this: FairEconomist did (via NakedCapitalism). The answer is of course for the central bank to require a certain amount of interbank lending as collateral at the window. There’s no reason not to make interbank receiveables eligible given the other things that are, and by requiring that banks use [...]
There is a some talk at the moment of a historic opportunity – an opportunity to refound the economy on sounder principles, to shackle the banking system in the service of society, to rebalance the inequalities between the very rich and the very poor, or at least between the hedge fund manager and the minimum [...]
Confirming the insurance industry habit of substituting claims adjustment for underwriting diligence, MBIA is suing Countrywide according to Housing Wire:
The breach-of-contract lawsuit, filed in New York State’s Supreme Court, suggested that Countrywide developed a “systematic pattern and practice of abandoning its own guidelines for loan origination,” in effort to inflate its market share during the [...]
Bible Spice
I’ve been a little busy recently so this will be brief. One scary part of the bailout bill was the clauses suspending mark to market. Firstly the idea of government intervening in accounting is a bit worrying: there is a long tradition in the US of the SEC telling firms what the FASB [...]
Only four years too late, the New York Times has an article on the SEC CSE regime and how it didn’t do enough to constrain the broker/dealer’s risk taking. It’s nice the Times is finally getting around to this kind of thing, but no one was interested in financial regulation and the scandal that [...]
FT alphaville has the details in a most impressive post.
I don’t believe this post but I think it is interesting… John Hempton maintains that the US banking system has, or at least could soon have if it retained earnings, enough capital. [My first worry is that while this might be true on aggregate, some institutions are undercapitalised, and the market does not [...]
