A shameful lack of liquidity constraints

Bloomberg points out something that we should be quite troubled by: In 2,615 pages of financial reform legislation introduced in the U.S. Congress, there are no rules to ensure that banks keep enough cash-like assets when credit disappears. Guidelines on liquidity risk management, which were published March 17 by the Federal Reserve, the Treasury Department […]

Avoiding the legal and profitable

An excellent perspective on financial reform from Steve Randy Waldman: I won’t hold a grudge against some mid-level banker who put together crap CDOs because everyone was doing it, and who knew housing would collapse*, and it was very lucrative… [There are] organized practices which, innocuous act by innocuous act, do in fact serve to […]

Convertible gilts and other exit strategies

The Sunday Times (via FT alphaville) suggests: Advisers to the government are working on a secret plan that could allow the state to start cutting its shareholdings in British banks just weeks after the general election. The plot would see the Treasury create “convertible gilts” — government bonds that could be exchanged for shares in […]

How did the crisis spread? Let me count the ways

In an interesting FED paper, How Did a Domestic Housing Slump Turn into a Global Financial Crisis? Steven Kamin and Laurie Pounder DeMarco discuss how the subprime issues created a global financial crisis. They agree with the perspective I took in my two articles in Quantitative Finance (here and here) that direct exposure to subprime […]

Improving sport

Yesterday the Guardian suggested that one of the ways to improve the spectacle of Grand Prix would be to draw lots for grid places, and award points for overtaking rather than finishing. That would make for an interesting race. It’s another of their suggestions, though, that intrigued me: banning communication with the pits. I have […]

In praise of weak leadership

Oliver Burkeman in the Guardian quotes Alasdair MacIntyre: One key reason why the presidents of large corporations do not control the United States is that they do not control their own corporations… When implied organisational skill and power are deployed and the desired effect follows, all that we have witnessed is the same kind of […]

Monoline Death Watch

Rather like Lost, the Monoline Death Watch has been going on so long that one can neither remember all the twists and turns, nor rouse much enthusiasm for the final denouement. Still, the news from Bloomberg that Wisconsin Insurance Commissioner Sean Dilweg is taking over a portion of Ambac’s policies to protect municipal bondholders who […]

Negative swap spreads

The ten year USD swap spread went negative. As I believe the kids are not saying, big woot. Some commentators went so far as to suggest that this is because swap spreads represent AA credit, and the USD government is not even that these days. What tosh. Sorry, but really, it is. First note that […]

Credit Valuation Adjustments

FT Alphaville picks up a warning from Credit Suisse Research on one of the more obscure aspects of Basel III (2.5?), credit valuation adjustments. There are several things going on here. First the idea is that you should mark credit on bilateral contracts so that if we do a swap, I discount net cashflows from […]

Be careful what you build – but not too careful

After a disaster it is easy to say that the people involved behaved badly. Your car crashed, so the manufacture ‘must’ have been at fault: your wine was bad, so the cork ‘must’ have been too cheap. But often bad things happen when you are trying to give the customer what they want. CDO structuring […]

Education today…

Is it really old fashioned of me to be depressed at having found two grocer’s apostrophes in the abstract of a Harvard paper? Now admittedly it is only an undergraduate paper, but really, whatever our view of CDOs, we definitely should not tolerate CDO’s.

Understanding fractional reserve banking

I have an embarrassing confession. I have never understood the concept of fractional reserve banking. Or, at least, while I could follow the argument easily enough, when I tried to write the corresponding accounting entries, I couldn’t. This was filed under `things I will figure out at some point’ until recently, when I read a […]

More exchange shenanigans

Felix Salmon appears to have spotted something which casts a whole new light on the pro exchange slant of the Dodd bill: Dodd’s wife, Jackie Clegg, is a director of the CME, which paid her $153,219 in 2009; she also owns shares in the company worth about $235,000. If this is true the industry should […]

Michael Lewis foresees war – a war over money

From a short but frank Reuters interview: There is a war that is about to happen over not just who regulates Wall Street but what the rules are.” “To put it in the crudest possible way, these firms have to be smaller and less profitable,” Lewis told Reuters. “If they were regulated properly and the […]

The importance of aligning revenue and product

As a palate cleanser between stodgy doses of regulation and financial disaster tourism, I’d like to reference an interesting criticism I read recently of the advertiser led business model — Google’s business model. The article is EMC vs. Google: There Should be No Competition by Rob Enderle on IT business edge. For me the key […]

Making collateral for the window

Many people knew that banks created bonds explicitly for use at the central bank window, and never showed these bonds to the market. It is interesting that the broker/dealers were in on the trick too. Or, at least, one of them was. From page 1393 (I know, I know – but I probably sleep more […]

The end of the OTC market?

I very much hope not, but this ill-advised clause is in the draft Dodd Financial Reform bill: It shall be unlawful for any person, other than an eligible contract participant, to enter into a swap unless the swap is entered into on or subject to the rules of a board of trade designated as a […]

Risk management after Valukas

With the (justified) fuss over Repo 105, some of the earlier material in the excellent report by Anton Valukas of Jenner & Block on the Lehman failure seems to escaped much comment. Here, then, I would like to comment on the rather depressing perspective the report casts on risk management. My sources are in volume […]

Answering Kaufman in the past historic

Senator Ted Kaufman writes: I start by asking a simple question: Given that deregulation caused the crisis, why don’t we go back to the statutory and regulatory frameworks of the past that were proven successes in ensuring financial stability? It is a reasonable question. There are three components to the answer: First, the finanical system […]

Turner turns tougher – or not

Two contradictory signals. First from the FT: Regulators have ordered UK banks to run a new round of tougher stress tests that assume the economy will endure a double-dip recession that would force unemployment up to 13.3 per cent. The banks will be required to prove that their tier core one capital ratio – a […]