What happens when you allow enough tax avoidance

What’s the common thread between the Russian default of 1998 and the Greek travails of 2010? Tax avoidance of course. As Bloomberg says, tax dodging is common is Greece: Prime Minister George Papandreou’s drive to tackle the European Union’s biggest budget deficit and pacify investors who have dumped Greek assets may hinge on convincing more […]

The Hippy-fueled crisis

We begin with something interesting, if wrong. Did Woodstock hippies lead to US financial collapse? (HT the Economist’s View). The sense in which there might be something to this rhetorical (at least in the author’s mind) question is that changes in morality which started in the 60s in some sense contributed to the current crisis. […]

Why bankers aren’t Cristiano Ronaldo

The Guardian yesterday had a tacky little article, Why bankers aren’t Cristiano Ronaldo. The eponymous question could of course be answered simply by pointing out that most bankers are a good deal more honest than Ronaldo, a good deal less ostentatious, and rather better drivers. Let’s review the vitriol. When pushed, those who attempt to […]

Dumb structuring to the max

FT Alphaville reports Most CDOs have overcollateralisation tests that are triggered if the CDO’s collateralisation levels fall below its minimum requirements, as defined in the deal. For certain CDOs, if that happens it’s counted as an event of default — triggering a potential reshuffling of payments for investors. Whoever thought that this was a good […]

The future of public debt

A recent paper by Cecchetti et al. The Future of Public Debt has been widely noticed: see for instance here for Ritholtz or here for the Econgrapher. The paper is certainly thought provoking. In particular, it points out that the time bomb of ageing populations is not confined to Japan: The current expansionary fiscal policy […]

Muni insurance blues

I always thought that of the monoline insurer’s two businesses, writing wraps on muni bonds was safe, while writing wraps on structured finance instruments was dodgy. It seems I was wrong about the first part. From Bloomberg: Ambac Financial Group Inc., the second biggest bond insurer, faces as much as $1.2 billion in claims if […]

High culture and discarded toys: from Frankfurt to Clapham

One of the things I love about the LRB is how it goes from high to low so effortlessly. Here are two sections from adjacent paragraphs in the same article in the current issue. First, the Frankfurt school: … here’s something about the whole economic system that is false, because what capitalism brings about is […]

Red meat

I love these reds… Sometimes in winter all it takes is a flash of colour in the sun to lift one’s mood.

Dynamic provisioning: reality and fiction

There has been considerable interest recently from the BIS in dynamic provisioning. The basic idea is that we should take provisions to reflect what expected losses will be over the life of the loan. Superficially this makes sense: if we know we are close to the peak of the economic cycle, then losses will be […]

Model risk provisions

Zero hedge picks up on some interesting information at the end of an Economist article: JPMorgan Chase holds $3 billion of “model-uncertainty reserves” That number feels reasonable in the context of a bank with nearly a hundred billion of capital. But I’d love to know how they got it past their auditors…

Should Greece default?

John Kemp thinks that Greece should default and reschedule. I wonder. The idea has immediate appeal from the point of view of punishing imprudent lenders. But, attractive though that is, would it be the best thing for the Greek people? It rather depends on whether the incremental cost of raising money post default is larger […]

The empirically optimal volatility for hedging short dated S&P 500 index options

A draft of a new note of mine can be found here. Here is the abstract: This note studies the optimal volatility for Black Scholes hedging in practice. The notion of hedging at a volatility which minimises the variance of the daily P/L of the hedged portfolio is introduced, and this measure is christened prophetic […]

Haldane’s Hangover

I have been meaning for a while to get to a speech given by Andrew Haldane recently: Haldane is one of the most thoughtful central bankers I have come across, and he usually has something interesting to say. The Debt Hangover is no exception. Let’s start with Haldane’s explanation of the recent rally: First, the […]

It is still commercial real estate, stupid

Nice graffiti, shame about the delinquencies.

Liquidity derivatives

There has been predictable outrage at Citi’s invention of a type of liquidity derivative. I have not looked at the specific Citi instrument, but I think that there is a place for liquidity derivatives. First, notice that this risk is not new. Pensions funds — like many buy and hold investors — have been profiting […]

Count the crises

A nice list from the Big Picture of a few crises from 1970-2000 (which I have edited slightly): The Nifty Fifty stock market boom and subsequent correction of the early to mid 1970s Franklin National Bank Failure on 1974 Penn Square Failure of the early 1980s Gold bubble in 1980 The Savings & Loans crisis […]

The problematic notion of valuation

One of the great advances in 20th century critical thinking was the realisation that seemingly simple notions like race, sexuality, or power, are actually rather nuanced and complex. It’s time to do the same to another 19th century idea that is too simple for the general good: valuation. The issue is that some accountants, regulatorys, […]

Euro double standards

I have been meaning to write a post for a while about the one thing that unites American commentators from the left and the right, namely how screwed the Euro is. It is truly amazing that despite the success of the Eurozone, the appreciation of the Euro against the dollar (and sterling), and the enormous […]

Evolutionary regulation

I mean that as in the ‘nature red in tooth and claw sense’. One of the many reasons that Basel 2, 3, pick a number, is bollocks, is that it permits little diversity, at least if taken seriously. (Some countries don’t take it seriously, of course.) We’d be better off letting countries innovate, and then […]

Jaime says stop making so much money

I like naked capitalism: it often has interesting things. One of them recently was an article about liquidity buffers. I have to confess to laughing, though, when I first read it. The august head of the BIS was rechristened cuddly Jamie Caruana. Jaime wouldn’t like that. In fact, he doesn’t like much. As NC says: […]