As part of a series on the new Basel Committee Trading Book proposals, notice first that the text contains quite a sophisticated notion of time horizon:
A bank’s IRC model must measure losses due to default and migration at the 99.9% confidence interval over a capital horizon of one year, taking into account the liquidity horizons [...]
Corporates trading through their sovereign in the CDS markets, from Zero Hedge:
Is £325 billion out of £2.4 trillion enough?
Update. In honour of this auspicious day, a picture of a game of Find The Lady, taken from the top of a bus. The unshaven gentlemen with the cap doesn’t look much like Fred Goodwin, but one never can tell.
‘ve also played around with some of [...]
The FDIC calls this a stress test. Huh?
Seeking alpha suggests fair value in some parts involves a 36% decline from here. Given that downturns usually overshoot fair value, a reasonable stress test would involve at least a 40% fall, and probably 50%. The FDIC has bottled it.
They say… CDOs of ABS (so-called “resecuritisations”) are more highly correlated with systematic risk than are traditional securitisations. Resecuritisations, therefore, warrant a higher capital charge. Fine so far. But then look what they do:
(The new capital charges are in the grey hatched columns.) So the capital charge for a senior charge of [...]
It is clear by now that the lender of last resort function – and especially the capital provider of last resort function – is valuable. How should the state be paid for this function?
The historical answer has been that this is a gift to the banking system, with the state attempting to recoup its [...]
Suppose a bank buys an option written by a corporate. It ends up in the money. The bank hopes that the corporate will pay out.
But what if lots of other banks have bought the same type of option from lots of corporates. Very few of them hedged, and all the options are [...]
An article by Polly Toynbee in yesterday’s Guardian gave me pause for thought. She said:
Labour has lost its political talent. So long in power, ministers are now managers toiling in their silos, talking like policemen, devoid of political imagination.
This is clearly true. It’s hard to think of any Labour politician today of ability, [...]
From an interview with Philip Tetlock on CNN money about prediction:
The better forecasters were … self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes and were rather modest about their predictive ability. The less successful forecasters were like hedgehogs: They tended to have [...]
It keeps getting worse in the equity markets:
Meanwhile in the credit markets, the terms of FED financing that are going to be available shortly (three years, ten to one leverage, non recourse, Libor plus 100) are so generous that one would be foolish not to load up. If one had any fresh capital, of [...]
This is so far beyond sarcasm that I am going to report it straight. Bloomberg tells us:
Former Securities and Exchange Commission member Annette Nazareth is the leading candidate to become deputy U.S. Treasury secretary, according to people familiar with the matter.
Nazareth ran the SEC division of market regulation… when it designed a program to [...]
The slow slide continues. Following S&P and in response to MBIA’s restructuring plan, Moody’s downgraded MBIA to B- from BBB+ on Wednesday. The best bit is on Bloomberg:
Credit-default swaps tied to MBIA Insurance Corp. jumped 7 percentage points to 60.5 percent upfront, according to CMA DataVision in London. That’s in addition to 5 [...]
No, not a woman clothed with the sun, and the moon under her feet, and upon her head a crown of twelve stars. Even Victoria Beckham wouldn’t wear that, even if she does occasionally forget to put on a shirt with her tie. Rather, according to the FT:
The US government may have to [...]
“Knock knock”
“Who’s there?”
“Maybe it’s a big horse*.”
“Maybe it’s a big horse who?”
“Maybe it’s a big horse I’m a Londoner that I love London town**.”
[Hat tip the Guardian Diary.]
* Gratuitous Mark Wallinger reference.
** Classic footage here.
If this WaPo story is really true, Geithner shouldn’t be left in charge of a sweet shop let alone a bailout.
There is a story, probably just a rumour, that there used to be a man at the Bank of England who had a “not read” stamp. He would use it to stamp documents he wanted to be able to claim he had not seen before returning them to the sender.
The fact that this [...]
There is a `the banks are insolvent’ meme going around at the moment. It’s rubbish, but something close to it may be true.
The reason it is rubbish is that solvency means assets > liabilities under the firm’s accounting standards. This is clearly true for all the large banks.
What the commentators mean by `the [...]
A Bloomberg headline: Japan Economy Shrinks 12.7%, Steepest Drop Since 1974 Oil Shock. Now, I would have thought that that was bad for the yen. But no. Scroll down a couple of headlines and you find: Yen Rises as G-7 Says Slump to Persist. Wrong again.
Warning: (amateur) philosophy ahead.
I like Jerry Fodor’s articles in the LRB. They are always well-written, provocative, and often wrong. Here is a recent example. Jerry is talking about whether physical things can increase your brain capacity, so that in particular if you lose your notenook (PDA, whatever), have you literally lost (a [...]
At some point I might get around to looking at this in more detail, but just imagine for a moment that you were short downside gamma on Lloyds yesterday. Even if you were short – really short – you would almost certainly have taken a very nasty bath. So much for Black-Scholes hedging.
From Reflexive Modeling: The Social Calculus of the Arbitrageur by Daniel Beunza and David Stark:
Modeling entails fundamental assumptions about the probability distribution faced by the actor, but this knowledge is absent when the future cannot be safely extrapolated from the past…
By privileging certain scenarios over others, by selecting a few variables to the detriment of [...]
According to the FT, 47.6 per cent of all CDOs of ABS by volume issued since the market substantively began in 2002 have now hit an event of default. Wow.
Paul Kedrosky has a nice comment on the Obama take on nationalisation. Obama first, from ABC Nightline tonight:
Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d [...]
…this sums it up reasonably
OK, that was perhaps unfair. But it is a little short on details, and what he did say is not enormously reassuring. There are three steps Geither detailed in his announcement.
First, a stress test for everyone big enough to matter, and TARP 2 capital for those that need it [...]
Lockhart is an amateur though: he should have waited until Geithner was speaking to announce that Fannie and Freddie may need another $200B. There were some temporary imbalances that made their numbers pretty dramatic he said. Yeah, right.
Willem Buiter suggests that Many high-profile, large border-crossing universal banks in the north Atlantic region are dead banks walking – zombie banks kept from formal insolvency only through past, present and anticipated future injections of public money.I think this is over-stated. We simply do not know if they are solvent or not. We [...]
Equity Private is smart – I don’t always agree with her, but when she’s describing things rather than satirising them, she often makes a lot of sense. And so it is with a recent dealbreaker post on flat rate tax here. She points out the utter waste of effort involved in the current [...]
Information Arbitrage thinks, and I agree, that the Geithner plan due tomorrow will fail.
Why? Excessive complexity. For a plan of this magnitude to work, it needs to be straight-forward, easy to understand, clearly communicated, brutally transparent, and ruthlessly executed.
Certainly the bailouts have revealed that the US system is not good at generating simple, easy to [...]
A friend of mine is dipping a toe into writing code to support prop trading. So, in the spirit of telling tales out of school, let me make some observations about this business.
The users don’t know what they want. And they cannot spare the time to tell you even their incoherent and ill-posed [...]
No, not the closing down sale at one of Britain’s many bankrupt retailers, although it could be. Rather it is the fall in property prices from the peak in one of the exurbs of Fort Myers, Florida. The NYT story is here. But mull on that number for a second. 80%. [...]
My new book on the Credit Crunch went off to my editor today. Here’s a contents list:
1 What Happened? 1.1 U.S. Residential Property: The Crunch Begins 1.2 Old and New Style Banking 1.3 What Happened in the Markets: The Second Stage 1.4 Après Lehman le Déluge: The Third Stage 2 Understanding the Slime 2.1 [...]
This week’s no shit Sherlock award goes to… Treasury Overpaid For TARP Investments. What is more interesting, though, is utterly spurious precision being treated as fact. Yes, I am sure Treasury overpaid, but saying things like Treasury paid $254 billion for assets worth approximately $176 billion implies that with a bit of due [...]
Paul Krugman, who I normally have a lot of respect for, writes:
The figure above plots … It’s not a perfect fit — this is economics, not physics,…
(Emphasis mine.) Honestly, what other academic discipline could dismiss the inaccuracy of a theory with an airy `this is not physics?’ Economists wonder why many people think [...]
A great data point from S&P via the New York Times:
The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency.
The financial institution that owns the bond calculates the value at 97 cents [...]
I don’t usually link to videos, but…
Warning: this is a change from our usual programming. If you are not interested in the theory of interacting systems, you might want to skip it.
One of the things that has really changed with the widespread use of computer models is the achievability of perfection. What do I mean? Well, one big [...]
Interfluidity has a long an excellent post on bank rescues and nationalisations here. I won’t reproduce the main ideas, interesting though they are, because I want to comment in particular on one particular proposal:
The government should commit to fully reprivatizing nationalized banks (really their sliced-up and reorganized successors) within a year of taking a [...]
For a lot of reasons, I think a bad bank without prior nationalisation is a bad idea. But if you were going to do it (as lots of people now seem to think is likely – see FT alphaville here for a summary), what would you do?
The key problems are valuation and moral hazard.
For [...]
