Practical procyclicality

There is a noticeable piece of terminological gymnastics that commentators engage in when discussing regulatory measures. If they are in favour of something, they call it risk sensitive. If they are against, they call it procyclical. Now, not all risk sensitive measures are procyclical and vice versa, but the connection between them is strong, and […]

Financial Innovation

Nicola Gennaioli, Andrei Shleifer, and Robert Vishny have a new paper on Financial Innovation and Financial Fragility which makes some interesting points. Their basic claim, to distil an extended argument into too small a space, is that financial innovation often causes instability because the risks of the innovative instruments are misjudged. In particular, securities are […]

Slowing down

Deus Ex has tried, and mostly succeeded, to post daily since the start of the financial crisis. Now, though, the posting rate has slowed, and that will probably not change, at least for a while. The reasons are multiple: there is a new stridency about much financial blogging, which I do not want to emulate, […]

What did the shorts do?

In all the comment about SEC vs. Goldman, the transaction structure has not been very clear. So what happened? Conceptually it’s not too complicated. First suppose we have an ordinary CDO: an SPV buys some bonds and issues some tranched securities. Easy. Now suppose that a hedge fund wishes to bet that the bonds will […]

A quick verdict on fair value and the crisis

Not proven, thanks to realistic doubt. Level 3 is your friend.

Lehman and what it tells us about clearing

Via Felix Salmon, I picked up a post by the Streetwise Professor on the CME liquidation of Lehman’s positions. Remember that Lehman’s portfolio on the exchange comprised liquid contracts which the exchange might have you believe can easily be valued. Nevertheless, the liquidation of these positions cost Lehman’s estate $1.2B more than its marked value. […]

Valuation uncertainty and leverage

I like Steve Randy Waldman so I don’t want to cricitise him too much, but I think he makes an error in the following: On September 10, 2008, Lehman reported 11% “tier one” capital and very conservative “net leverage“. On September 15, 2008, Lehman declared bankruptcy. Despite reported shareholder’s equity of $28.4B just prior to […]

Greek tragedy averted

As was always very highly likely, Greek default has been averted. You might add ‘for now’, and certainly the omens are not entirely good. However in looking at the PIIGS one must understand the context: the Euro project, as we have previously commented, is not primarily an economic one. It is political. This means that […]

Enjoy spring

I’ll be away for a few days, which is a shame in some ways, as the flowers are just starting to look good.

In praise of peace

I think it is appropriate at Easter to celebrate two substantial achievements of the past quarter century. First, one of Tony Blair’s. I am not a fan of Blair, and his score on the warmonger/peace maker axis is decidedly unimpressive, but he did do a lot to make peace in Northern Ireland possible. For that, […]

Lo uncertainty

Andrew Lo and Mark Mueller have a new paper which has a very nice explanation of an idea that I have long held, namely the importance of distinguishing between those situations where you know the form of the distribution and it suffices to estimate its parameters, and those situations where the parameters change over time. […]

Was there a huge magnet over Madoff’s place?

From the BBC: Scientists have shown that they can change people’s moral judgements by disrupting a specific area of the brain with magnetic pulses. They identified a region of the brain just above and behind the right ear which appears to control morality. And, by using magnetic pulses to block cell activity, they impaired volunteers’ […]

Financial regulation in Sans Seriffe

Long time readers will know that I am an admirer of the small island of Sans Seriffe. Despite its size and favourable position, it is not a tax haven, and the gentle lapping of the waves on the beach at Bembo is quite something to behold. Now it seems that the Seriffean finance minister, Claude […]