People cause crises (incentive structure edition)

Lisa Pollack has an interesting, if rather too fair minded post on Alphaville about the dubious claim that the Black-Scholes formula somehow caused the crisis. Let’s be clear. Black-Scholes is about options pricing, and hedging in particular. It has nothing to do with securitization, and little with tranching. So the claim that Black-Scholes caused the […]

Local interventions

If you wander around Shoreditch, you see some strange things. Some of them are the result of the whole area being a kind of informal gallery space. Take this pair for instance: They just appeared a few months ago, hung around for a while, then disappeared. The two signs were indeed about 100m apart and […]

Pay for performance from politicians (shock)

An interesting initiative this, from the US. The HuffPo explains: Both Houses of Congress are currently considering a bill which, in my humble estimation, would be wildly popular with the public — if they knew about it, that is. This is a truly non-partisan issue, one that pits every taxpayer in the country against the […]

Interconnected and proud

According to Bloomberg, The largest U.S. banks, including JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), told the Federal Reserve that a limit on their credit exposure is unnecessary and “fundamentally flawed.” They are of course wrong. The FED’s single counterparty credit limit (10 percent of capital for credit risk between a […]

Does your CVA hedge generate CVA?

Yes, it (often) does. Credit Suisse offers us an example. First, what we know, from CS themselves. In 1Q12, we entered into the 2011 Partner Asset Facility transaction to hedge the counterparty credit risk of a referenced portfolio of derivatives and their credit spread volatility. The hedge covers approximately USD 12 billion notional amount of […]

Who do the politicians work for?

Steve Randy Waldman observes the problem: The behavior of politicians, in Europe as in the United States, suggests that the people to which they are accountable are not primarily the fraction of their labor force that is out of work. This is different from the 1970s, when elected officials did seem to behave as though […]

Interest rate risk in the banking book – a little bit hidden?

A typically histrionic post on Naked Capitalism about interest rate risk in the banking book gave me pause for thought. (Don’t you wish there was a browser plugin that could turn down a website automatically; it would substitute ‘unexpected inconvenience’ for ‘hidden time bomb’ for instance… Also, NC, for reference, the duration of a bond […]

Dudley’s reasons for OTC derivatives market reform

In a recent speech, Bill Dudley describes why he believes the pre-crisis OTC derivatives market needed reform. Let’e examine his case. [During the crisis] collateral calls generated by sharp movements in the mark-to-market value of the OTC derivative trades drained liquidity buffers and provoked the fire sales of assets. These fire sales increased volatility and […]

It ain’t over yet

NPR reports: More U.S. homes are entering the foreclosure process, setting the stage for a surge in properties repossessed by lenders this year. The number of homes that received first-time foreclosure notices rose 7 percent in March from the previous month, foreclosure listing firm RealtyTrac Inc. said Thursday. The US housing market is not out […]

Fracking story of the day

From that most reputable of news sources, the Daily Mash: The chances of shale gas exploration releasing a monstrous denizen of the underworld are less than one in three, experts have claimed. As the army continues to fight two hundred chittering, horned creatures released during a test extraction in Blackpool, energy companies insist they can […]

Accounting for credit risk before the crisis – a case of a gateway drug?

(Crossposted from FT Alphaville.) “The question is,” said Alice, “whether you can make words mean so many different things.” In a recent Alphaville post, I made the claim that if the monolines had been required to mark the credit risk that they had taken to market, they would not have played such a prominent role […]

A corporation’s duty to shareholders

My earlier post on the duty a company has to maximize profits to shareholders attracted quite a lot of comments (well, quite a lot for DEM anyway). Andy helpfully pointed me towards Dodge v. Ford Motor Company, and that in turn lead me to Lynn Stout’s paper on the case. What we seem to have, […]

CPSS IOSCO in favour of motherhood and apple pie

They also, in a hat tip to Lisa Pollack, say that kicking lolcats is wrong. Probably. The new CPSS IOSCO report on Principles for financial market infrastructures is here and, like prior documents from CPSS IOSCO, it is lamentably short on detailed objectively testable requirements. Take this, for instance: Principle 4: Credit risk An FMI […]

Big oops

Bloomberg tells us: Two years after President Barack Obama vowed to eliminate the danger of financial institutions becoming “too big to fail,” the nation’s largest banks are bigger than they were before the credit crisis. Five banks — JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman […]

Manchester Beef and other good things

OK, the Robert Biggert Collection of Architectural Vignettes on Commercial Stationery might not be for everyone, but check it out, it’s awesome.

Encouraging diversity

Charles Goodhart and Wolf Wagner have an interesting but flawed idea which harks back to a recent post of mine: …[The] lack of diversity [among financial institutions] is very costly for society. Similar institutions are to encounter problems at the same time. This makes systemic crises – such as the crisis of 2007-2009 – more […]

Cheapest isn’t always best

In my alphaville parrot post, I claimed that clients find CVA confusing, and further that going with the cheapest all-in quote for a given trade is not necessarily optimal, because (a) CVA depends on the existing portfolio and (b) some banks have more or less expensive CVA calculation approaches. Here’s an example. Let’s describe the […]

So that was interesting

The fourth and fifth Alphaville posts are here and here. Normal service will be resumed here next week, but meanwhile thanks to the Alphaville team for a fun week of guest blogging, and to Alphaville readers for their great comments.

The doom loop

I cordially dislike that phrase, but a lot of people call it that so I got in line. Ah well, mildly histrionic terminology notwithstanding the third Alphaville post is up.

A tragedy in three acts on Alphaville

The second in the series of FT alphaville posts on CVA is here.