Sausage makers like sausages

An important catch from Tracy Alloway at FT alphaville, this: Ing-Haw Cheng and colleagues looked at how the personal portfolios of mid-level staff involved in the securitisation industry in 2006 did, and found that they were even worse than the ordinary’s Joes’. Why? A job environment that fosters “groupthink, cognitive dissonance, or other sources of […]

Martin Taylor is seriously out of date

He says: In the 1990s IT did not enjoy especially high status within banks. Real men, then as now, wanted to meet property company bosses at the Savoy Grill and lend them huge amounts of money that were unlikely to be repaid. This is of course wrong. Real bankers now want to meet property company […]

Risk management quote of the week

Well, of six weeks ago actually, but it is still good: Safety is a product, not a process. It is being said in the industrial accident context. I’ll let the Ranter explain: In general, effective safety measures are usually something you do, and scattering costly “devices” around an unchanged process is a classic failure mode. […]

When the rain freezes on the trees…

… it’s kinda magical. (Click to enlarge.)

One chart to explain it all

Well, perhaps not quite that much, but still, this, from Business Insider is insightful:

Pricing far out of the money derivatives in the P measure

OK, not the most attractive title in the world I know but bear with me. Most derivatives are priced in the Q, or risk neutral measure. This is the right thing to do when you are willing and able to hedge. Essentially in the Q measure the cost of a derivative is identified with the […]

The FED’s collateral policies during the crisis

I can’t believe that I missed this two years ago when it came out, but I did, so herewith find Bloomberg’s carefully-researched and probably not at all conjectural expose of the FED’s collateral policies in the crisis: Last week the Federal Reserve bravely released 894 PDF files containing 29,346 pages that detailed its heroic actions […]

Should banks reserve through-the-cycle?

The elephant in the accounts is often loan loss reserves, those oh-so-easy-to-manipulate, oh-so-big (if not actually big-eared) amounts that often drive bank earnings. If you though derivatives valuation was dodgy, welcome to the loan book. The most recent, if not the most egregious examples are surveyed in a recent Bloomberg post: More than 31 percent […]

The heart of winter

Bubble me do

‘Bubbles’ are much in debate – by Gavyn Davies here and here, Daoud & Diaz here, Fama here, Stein here, and so on. A key issue, obviously, is what is a bubble. The Brunnermaier definition is Bubbles are typically associated with dramatic asset price increases followed by a collapse. Bubbles arise if the price exceeds […]

So what exactly is the rate you are borrowing at to fund that derivative?

As everyone who has been paying attention knows, JPM had a $1.5B FVA hit in their most recent results. Matt Levine riffs amusingly if sometimes a little inaccurately* about a couple of aspects of this, my favourite part being: there is… some gap between “my funding cost” and “FVA.” It’s unclear to me how much […]

Early candidate for the best politics article of 2014

It’s this piece by Ezra Klein on the role of motivated reasoning in political posturing (I was going to call it ‘debate’, but all so often, as Klein points, there is no desire to exchange views).

More fun with less colour

After seeing one output from Silver Efex Pro recently, I have been playing around with it some more. This ice image is a perhaps a little too contrasty: But it is to my eyes a lot better than the B&W you get out of Photoshop’s native converter: (Click for bigger.) Clearly in niche areas like […]

It’s the liabilities, stupid

Jeremy Stein makes three good points: Banks are almost always and everywhere largely deposit financed… The asset side of banks’ balance sheets – and, in particular, their mix of loans versus securities – is considerably more heterogeneous… One interpretation of this is as follows: While lending is obviously very important for a majority of banks, […]

Cost Benefit Analysis is so bad we need more of it

John C. Coates says: quantified CBA on those rules [in the Dodd Frank Act and elsewhere in financial regulation] amounts to no more than “guesstimation,” entailing (a) causal inferences that are unreliable under standard regulatory conditions; (b) use of problematic data, and/or (c) the same kind of contestable, assumptionsensitive macroeconomic and/or political modeling used to […]

New Year’s Hoenig

Yesterday I promised a dose of Thomas Hoenig. Here we go: separating commercial banks and broker-dealers would benefit all parties affected by the conduct of complex firms — including the public, the broader banking and financial industry, institutional borrowers, and the very firms that were at the center of the crisis. What struck me reading […]

Take my colour away

I had planned on blogging about this speech of Thomas Hoenig’s, but that will have to wait as a reader very kindly turned yesterday’s middle image black and white, improving it significantly. Thanks, Bill.

Normal servce will be resumed shortly

Meanwhile, some pictures…