What is, and isn’t possible with capital rules

Yves Smith at Naked Capitalism was kind enough to refer to some remarks I and the Streetwise Professor had made about Basel III. That got me thinking about what you can hope to achieve with any set of rules for internationally active banks. First, some general points: The Basel II rules are far too complex. […]

What’s the fair price of an asset subject to liquidation risk?

Bloomberg tells us that The Options Clearing Corp. threatened to liquidate Lehman Brothers Holdings Inc.’s trading positions in the 2008 financial crisis unless Barclays Plc bought its brokerage and took on the defunct firm’s obligations, a lawyer for the U.K. bank told a judge… A similar liquidation of Lehman derivatives the same month by options […]

Valuation ranges

This blog has consistently emphasised (OK, consistently bored the pants off its readers by emphasising) the importance of valuation ranges for financial instruments. For many such things, the idea of a single correct fair value is a mirage. Instead, it is more helpful to think of a range of values which might be correct. Steadily […]

Systems thinking, people thinking

I was going to amuse myself this morning taking apart a truly awful Felix Salmon posting on the use of the normal distribution in finance. (That’s what it is really about – it isn’t what Felix thought it was about when he wrote it, which is part of the problem.) But instead I am going […]

Crowded trades in capital arb

The Streetwise Professor points out something that I had not realised about regulatory capital arbitrage: not only do regulatory capital arbitrage opportunities blunt the impact of regulation, but they also produce crowded trades. By definition all the banks who engage in these trades are one way round, while all their counterparties are the other. This […]

A business model dies (thanks to regulators)

Bloomberg reports: Warren Buffett’s Berkshire Hathaway Inc., which has more than $60 billion at risk in derivatives, may scale back offering new contracts because of collateral- posting requirements, said a company executive… “If you are now going to have to post dollar-for-dollar collateral, and you can’t get a price in the market that we think […]

Liquidity stresses in Basel III

A rather good account is here. (Hat tip FT alphaville.)

Inefficient markets and inflation-linked bonds

There has been predictable hullabaloo about negative TIPs yields. The more balanced end of the spectrum is this from Reuters Investors are betting that inflation rate will rise, fattening the return on the securities and making up for the negative yield. Or this from Seeking Alpha: Why is the real yield negative? There are two […]


(My apologies for the dearth of posts recently: I acquired a horrible cold and it took me some days to kick it.) A long time ago I became interested in economics when someone – to my shame I can’t even remember who – pointed out that it wasn’t just dull money stuff, but rather that […]

Would you rather have a good bank, or a bad one?

Northern Rock’s results make the question rather moot. As the Guardian says: The bad bank recorded a pre-tax statutory profit of £349m compared with a £724m loss a year ago. On an underlying basis, the profit was £167m compared with a £243m loss a year ago… At the good bank – known as Northern Rock […]

The new abnormal

Naked Capitalism quote an article by Pimco’s global strategic adviser Richard Clarida and CEO Mohamed El-Erian in the FT. They point out that the expectations of future economic conditions are much wider than normal. From here they make two leaps, neither foolish but leaps nevertheless. They assume that not only are expectations more volatile, but […]

The socialisation of client money

Suppose you find yourself in a situation where you have to leave money with a financial institution. If it isn’t a deposit, then it won’t be covered by any deposit protection scheme. How can you protect yourself against the institution failing? The answer always used to be, make sure that the money is classified as […]

Market stability and quote latency

We know – or at least strongly suspect – that HFT activity has changed the nature of US equity markets, and likely others. Similarly, bots seem if not the culprit, at least one of the culprits in the flash crash. What should we do about it? Nanex (HT zero hedge) has a suggestion: Add a […]