Fact as fiction, and other storytelling techiques

One good way of telling the truth obliquely is to pretend that it is fiction. This was an established technique for ex-spys to spill the beans; and it works for bankers too. Humour is good here – it makes it clear that the author has enhanced the story for comic effect. Except that often they […]

Sovereign credit quality and foreign currency borrowing

Ambrose Evans-Pritchard in the Telegraph has an article about Iceland. He notes that the Icelandic krona has fallen by half against the euro since the dark days of 2008, and as a result there has been something of a recovery in Iceland. Unemployment is high, at 9.1%, but still below the Eurozone average. The head […]


In an article reminiscent of Cows accused of spending a lot of time in fields, Floyd Norris writes in the NYT: Politicians Accused of Meddling in Bank Rules He continues with more sound (if rather obvious) comment: Accounting rules did not cause the financial crisis, and they still allow banks to overstate the value of […]

Corporate default rates by year and industry

The details are below: click for a larger picture.

Instability and the cover rule

In the old days of equity derivatives, one of the main instruments was the covered warrant. This was a call option (usually – put warrants are uncommon) issued by a bank and traded as a security: it gave the holder the right but not the obligation to buy some number of underlying shares at a […]

This cancer

For once not the banks. Rather I am picking up an interesting article via Infectious Greed on properties of the Honda Accord through time. Who would have guessed that it was most economical in 1985? Or that it has increased in weight by nearly 50% since 1980? There are too many cars, they use too […]

Introducing Algo

Given that I used to be a computer scientist, my knowledge of algorithmic trading, aka high frequency trading, is shamefully slight. Partly it’s because the technology has improved vastly over the last five years: the algo guys used to be three or four nerds in the corner of a vast equity trading floor; now, everyone […]

Cry havoc and let slip the dogs of war accounting

OK, the revised version is perhaps a touch less catchy. Bloomberg reports: The FASB says it may expand the use of fair-market values on corporate income statements and balance sheets in ways it never has before. Even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached […]

Robust finance

John Kay in the FT comments on a theme that is central to this blog: Any engineer will tell you of the importance of making complex systems robust. You need inspections to prevent failure, to be sure: but since failures are inevitable it is equally important to try to ensure that the consequences of such […]


From Bloomberg: Morgan Stanley set aside 72 percent of its second-quarter revenue for compensation and benefits, more than Goldman Sachs Group Inc. or JPMorgan Chase & Co. Why on earth do the shareholders tolerate this? That’s nearly three quarters of their money, money that they as owners of the firm deserve, that is going out […]

39 Steps

No, not a (really rather good) novel by the 1st Baron Tweedsmuir, but rather the steps to revise IAS 39. For those of you who have not been following this slightly less gripping drama, this is the international accounting standard relating to the valuation of financial instruments. The IAS 39 replacement project is proceeding in […]

The modifier on innovation

There has been a fair amount of discussion recently about financial innovation. Willem Buiter has suggested that new financial products should have a licensing regime akin to drugs, and Felix Salmon has written provocatively on the link (or lack thereof) betweeen innovation and economic growth. This should be read in the context of David Warsh’s […]

A small town in Switzerland, part 3

Glorious, glorious, glorious is the day: yet more Basel. Here’s a key passage from BCBS158: Factors that are deemed relevant for pricing should be included as risk factors in the value-at-risk model. If you took the committee at its word, here, no one would have a VAR model. Just consider an equity derivatives book on […]

When a technology dies…

…you sometimes get a decent monument. Here are the sound mirrors at Denge, Dungeness.

Well that went well I think

From Wells Fargo via Creditflux: In their latest research report, Wells Fargo (formerly Wachovia) analysts calculate that 360 CDO of ABS have now triggered an event of default – up from 343 last month. At $351.6 billion, the notional value of these deals accounts for just over half of all CDOs of ABS.

A small town in Switzerland, part 2

The review of the changes to Basel 2 now moves to the credit risk rules. There isn’t much that is new here either: some tweaking of the credit conversion factors for liqudity facilities, and a new, seemingly penal treatment of CDO squared positions (which the committee in keeping with its mission to call everything by […]

Is Goldman just a credit punt?

The Big Picture suggests that it might be, and provides this initially compelling illustration (which I have edited slightly to make it less confusing). However, I think that what we are really seeing is that both overall credit spreads and Goldman’s stock price are driven by confidence. The more economic activity there is, the more […]

A small town in Switzerland, part 1

First the simple part. The new revisions to the Basel capital accord include Incremental Risk in the Trading Book. I have already commented on these proposals before, and there is nothing really new in the final version. In particular, there is still no clarity over what specific risk might be for, exactly, if you have […]

The world’s least favourite airline

I’m still digesting the proposed changes to IAS 39 and to Basel 2 (you wait two years for major accounting and regulatory change then two of them come along at one), so for now I’ll just quote a delightful Luke Johnson column in the FT. I read it on a plane, and I agree with […]

Goldman humour

From John Kemp via Felix Salmon: