A summer daydream, part 1

In a city park, perhaps in Brussels, perhaps in Washington, perhaps elsewhere, it is hot. A regulator named Alice lounges on a park bench on her day off. She feels the heat of the sun, and, exhausted by her labours, she falls asleep… … when suddenly a White Rabbit with pink eyes ran close by […]

Just because they tell you doesn’t mean it isn’t true

From the FT: Big US banks are warning that new rules on their funding risk damaging the more-than-$7tn “repo market”, where financial institutions borrow against government bonds, potentially destabilising one of the most important financial markets in the world. Analysts at JPMorgan Chase estimate that big banks in Europe, Japan and the US would have […]

De-commodification explained simply

From Peter Frase: Suppose you and I live in adjacent apartments. Now consider the following ways in which we might satisfy two of our needs: food and a clean habitat. In scenario A, I cook my own meals and clean my own bathroom, and you do the same for yourself. In scenario B, you pay […]

Where should US mortgage risk be held?

From the most recent 10-Qs: Fannie Mae mortgages on B/S, $3T. Freddie Mac ditto, $1.5T, plus $500B ‘mortgage related investments’. So, very roughly, Freddie and Fannie have between them $5T of US mortgages: they also finance roughly 90% of new US resi mortgages. Now what is very clear is that if you wanted to wind […]

That baby

Given that the news seems to be wall-to-wall royal baby, can I suggest that we call it ‘Rehypothecation’? Update… talking of which, Bloomberg reports that One in three financial institutions would accept “low-quality, complex and opaque” collateral to back trades provided that it’s “cheap,” according to a survey from SIX group. Clearly they caught the […]

A few interesting links

Izzy on the impact of the Basel leverage proposals on US repo, here. Matt Levine on double standards in treasury losses, here. Red Jahncke on size vs. complexity in TBTF breakups, here. A timely reminder from the bond vigilantes on the impact of interest diversion triggers in RMBS, here. Happy reading.

QE: real tool, or now just fictional?

Quoth Izzy: If it’s true that the Fed’s asset purchases are creating liquidity problems in the underlying — so much so that short squeezes are impeding daily market operations, causing settlement fails and negative repo rates — this leaves Bernanke in a tricky communication position… to say “we have to suspend QE because there aren’t […]

Fictional claims for futures

Philip McBride Johnson’s article in FOW has been causing a few heckles to rise. Essentially he claims that the swaps community has only themselves to blame for the higher margin period of risk on OTC derivatives vs. swaps because they claimed that OTC derivatives were different. Legislators, Johnson says, listened, and put swaps in a […]

The ECB attempts to revive the European ABS market

The ECB is reducing the haircut on ABS to 10 percent from 16 percent. At the same time, it is tightening rules for retained covered bonds so the total effect on eligible collateral will be “overall neutral,” it claims. In particular they are targeting SME-backed ABS: The ECB will continue to investigate how to catalyse […]

Why Harvey won’t answer

Matt Levine says, apropos the Goldman earnings call, that someone at Reuters counted the number of times he [Harvey Schwartz, Goldman CFO] was asked to quantify Goldman’s leverage ratio (eight) and the number of times he did (zero). Matt’s then amusingly unkind about Goldman’s explanatory note. He’s kinda right, it does bluster. So what’s the […]

Too hot to blog

Apparently the answer is an Aperol Spritz… Read this, though, in the meantime from the FT, on why rising bank profits are a PR disaster: it’s interesting. If, that is, you can bear to be close to a computer in whatever weather you are having. BTW, are the temperatures in NJ similarly elevated? I only […]

Soaking up the sun

The key part of the Warren-McCain 21st Century Glass-Steagall Act

The draft bill proposes the repeal of the Gramm-Leach-Bliley Act, and, after a transition period, that An insured depository institution may not— (i) be or become an affiliate of any insurance company, securities entity, or swaps entity; (ii) be in common ownership or control with any insurance company, securities entity, or swaps entity; or (iii) […]

Leverage, no mustard

Citi Research point out, in an excellent short note US Leverage, European Read-through that while the US leverage ratio is set higher, at 5%, than Basel it is both smaller scope (bank holding companies with more than US$700bn in consolidated total assets or US$10trn in assets under custody) and on a different basis (full derivatives […]

m-REIT questions and answers

Q. What’s does negative convexity mean for most US MBS? A. As rates go up, the bond’s duration lengthens, so it gets less valuable faster than a standard fixed rate bond. Q. What’s an m-REIT? A. A leveraged vehicle that invests in US MBS Q. So an m-REIT is a leveraged negative convexity play? A. […]

When too low is not enough

Unicredit’s Jean-Pierre Mustier, quoted in the FT, says We’re moving from a set-up where banks were interconnected, because they had transactions between them, to a system where very lowly capitalised entities, the clearing houses, are supposed to protect the banks from a problem. What to do? Well, the `finance director of a leading global bank’ […]

Four hints and a protestation

Paul Krugman gives some research advice. Four of his suggestions are helpful: Pay attention to what intelligent people are saying, even if they do not have your customs or speak your analytical language In general, if people in a field have bogged down on questions that seem very hard, it is a good idea to […]

Once, twice, three times a columnist

Three good ones from Matt Levine when I was away: Why Blackrock wants corporates to reopen bonds rather than issue new ones, and why they probably shouldn’t, here. Shock, horror, exchanges want people to trade on exchange, here. That antitrust case, here. Footnote 3 in particular amused me. Yes, I read footnotes in out of […]

And then the rain started

The new, low capital, Volcker-free prop trading book is…

… the CVA book of course. From the new FED rules: Therefore, the agencies clarify that non-credit risk hedges (market risk hedges or exposure hedges) of CVA generally are not covered positions under the market risk rule, but rather are assigned risk-weighted asset amounts under subparts D and E of the final rule [the standardised […]