When delegation fails

When you pay someone else to do something for you, the problem of what you are paying for, exactly, sometimes comes up. This is one of the issues with PFI, for instance; it seems to be essentially impossible to write a contract that defines what it means to run a hospital or a railway properly. […]

Investment bankers and other sharks

From the usually excellent TED, a nicely phrased three sentence argument for introducing compulsory ethics training for investment bankers: …giving access to IPOs at 10 to 15% discounts to fair value is valuable currency for us to share with investors who trade with us, direct business to us, and generally bolster our bottom lines. We […]

Paying for resolution, practically

So how would this pay for resolution by writing calls thing work? Well, first you need to calibrate the system. Fortunately Joe Noss and Rhiannon Sowerbutts (HT FT alphaville) have recently analysed the implicit UK taxpayer subsidy to banks, and concluded that it is at least £30 billion per year across the cycle. As a […]

Paying for resolution

Acharya, Mehran, Schuermann and Thakor have an interesting but ultimately flawed idea. They suggest: a special capital account in addition to a core capital requirement. The special account would accrue to a bank’s shareholders as long as the bank is solvent, but would pass to the bank’s regulators — rather than its creditors — if […]

‘Ordinary times’: Bagehot, liquidity premiums, and the window

FT Alphaville had a good post last week, referencing a new paper by Brad DeLong that in turn discusses the early history of central bank liquidity provision. One paragraph in particular gave me pause for thought: Bagehot never argued that central banks should lend only against good collateral. Bagehot was subtler than that, and less […]

Random regulation – an interesting but dangerous idea

In a provocative article, Michael Abramowicz, Ian Ayres, and Yair Listokin suggest that If legislators disagree about the efficacy of a proposed policy, why not resolve the disagreement with a bet? One approach would be to impose one policy approach randomly on some members of the population, but not on others, to determine whether the […]

Getting long vol cheaply

From Soc Gen, via FT alphaville: Implied volatility looks low overall, especially against credit spreads. The options market is split. Some assets trade at a significant premium against realised volatility, with safe havens like gold, JPY and USD rates left out with a low implied volatility. Interesting. If you think the Eurozone is about to […]

Some CCPs are systemic. Next up, dog bites man.

According to Bloomberg, the FSOC plans to designate some swaps clearinghouses as systemically important as soon as tomorrow, putting them under heightened supervision, according to two people familiar with the officials’ work.

Too big to invest

Perhaps tediously, I want to go back to the size of JPMorgan’s surplus liquidity. Bloomberg has some new data: About half of the $381.7 billion in JPMorgan’s chief investment office portfolio is in company bonds, asset-backed securities and mortgage debt not backed by the U.S. government, according to a March 31 filing. That compares with […]

Balanced economic analysis

With all the recent gloom on the UK’s economic prospects if the Eurozone goes into meltdown, it is a relief to read a balanced, nuanced analysis. From the Daily Mash: Britain will be a prehistoric barter economy within two years, the Bank of England has predicted. The bank’s latest projections show that negative growth and […]

The pizza system

One of the inspirations for this blog was Italian coffee. I mean that both literally – quite a lot of my posts are written with the aid of an espresso – and more theoretically; coffee in Italy is wonderful, cheap, and available very widely. I was curious how they managed it, and that lead to […]

JPM’s surplus liquidity problem…

…was huge. Really huge. The FT reports that JPM’s CIO has built up positions totalling more than $100bn in asset-backed securities and structured products – the complex, risky bonds at the centre of the financial crisis in 2008. These holdings are in addition to those in credit derivatives which led to the losses and have […]

Central musical chairs

Izzy Kaminska has a nice article on Alphaville that reiterates some of the points I have been making about central clearing (see for instance here or here or here). She is writing about central clearing and collateral/liquidity. Once again, we would like to draw on the analogy to a game of musical chairs. The game […]

Buy New England banks, sell the rest

The St. Louis FED map of bank failures clearly suggests buying banks based in New England against shorting those in the rest of the US. I’m joking of course, but it is interesting – and I am sure this map gave someone in the Boston FED a good day.

Looking gift horses in the mouth…

… is a good idea. Sallie Krawcheck writes on the HBR blog: Because the barriers to entry are low, there’s usually no good reason why returns in an institutional banking business should stay very high for an extended period. Competition should drive those returns down. As a result, sustained high returns on equity — especially […]

Changing models with Jamie

I have finally managed to track down the transcript of Jamie’s embarrassing call. My favourite part relates to JPMorgan’s VAR: We are also amending a disclosure in the first quarter press release about CIO’s VAR, Value-at-Risk. We’d shown average VAR at 67. It will now be 129. In the first quarter, we implemented a new […]

Hedge me up before you go, go

Hedges, pace JP Morgan, are meant to reduce risk. There are, it seems to me, two important ways to hedge. Although real hedges overlap between these categories, the distinction is useful. First, there are P/L volatility hedges. Here the idea is that risk is earnings volatility, and that you have some position which generates earnings […]

Sunny Sunday

At last…

Floating carcus ahoy

When Magellan emerged from the strait that bears his name into the Pacific ocean, he thought that he was only a few days sailing from Portugal and home. Good try, but no cigar. A similar navigational issue seems to be plaguing folks over last night’s $2B JPMorgan loss. Here are some things we can, and […]

Reserve substitution and the money multiplier

In an important and interesting article on VoxEU, Singh and Stella discuss a new and to my mind convincing analysis of the money multiplier (or the lack thereof). It is well known that, despite a massive increase in central bank money, there has not been anything like the concommitant increase in credit that the multiplier […]