Incremental risk in the trading book 1

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 […]


Corporates trading through their sovereign in the CDS markets, from Zero Hedge:

Snap reaction to RBS’s use of the Treasury Asset Protection Scheme

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 […]

Stress is bad for you

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.

Basel committee still clueless chumps

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 a AAA-rated […]

Paying in the last resort

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 […]

Legal risk, FX risk, and big moves

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 far in […]


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, […]

Expert advice

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 […]

Below 4000

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 […]

Deputy what?

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 […]

Monoline death watch

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 percent […]

Portents of the apocalypse

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 nationalise […]

A little light relief

“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.

Is Timmy that inept?

If this WaPo story is really true, Geithner shouldn’t be left in charge of a sweet shop let alone a bailout.

"Not read" and the management of psychopaths

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 story […]

Real Solvency and Fantasy Solvency

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 […]

Why I will never be a great FX trader

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.

Fodor foo-ey

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 part of) […]

Hedge this, sucker

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.