Friday, March 28, 2008

John Jansen looks at the TSLF and finds some evidence that the pressure may not be as great as feared.
Another cause of concern was the result of the first TSLF operation conducted by the Federal Reserve to sop up unloved and difficult to finance collateral. The Fed offered the street $75 billion of Treasury collateral and took a similar amount of toxic paper from the street in return. The so called stop out rate was 0.33 .Here is what I think that means:According to the footnote on the Fed website the stop out rate is approximately equivalent to the spread between the Treasury general collateral rate and the general collateral rate for the pledged security over the life of the loan. That means that the person who got financed at 33 basis points received finacing for this unloved stuff at only 33 basis points over Tresury collateral. That seems to indicate a lower level of stress in the system than some had expected. Additionaly the level of interest in the new facility os light as only $86 billion of bids were received for $75 billion of Treasury collateral.

Thursday, March 27, 2008

Liquid assets

The FT reports,
The Bank is preparing to swap illiquid mortgages, mortgage securities and other asset-backed securities on banks’ books for liquid assets it will provide, so long as commercial banks carry the can if the loans go sour.

“The banks neither need nor want the taxpayer to insure them against these losses,” Mr King insisted.

The Bank is now discussing with big UK banks how best this should be done. The options range widely.

At one extreme, perhaps the cleanest solution is for the Bank to purchase mortgages at a price close to face value, with the banks promising to insure the central bank fully for any loans that go bad. Taxpayers would take a hit only if the banks themselves went under while the banks would get cash, providing a welcome increase in tier one capital in return for illiquid assets.

Alternative mechanisms could include banks issuing covered bonds for the Bank to buy which are backed not only by the assets but also by the issuer. Or the central bank could buy mortgage-related assets at a big discount to face value to give taxpayers a high probability of coming out making a profit.

What were once liquid assets are no more.

Wednesday, March 19, 2008

Reputation and liquidity

The Economist amidst a look at the Skilling evidence, makes the connection between Enron and the recent liquidity crisis for investment banks.
"For many people, the mere fact of Enron’s collapse is evidence that Mr Skilling and his old mentor and boss, Ken Lay, who died between his conviction and sentencing, presided over a fraudulent house of cards. Yet Mr Skilling has always argued that Enron’s collapse largely resulted from a loss of trust in the firm by its financial-market counterparties, who engaged in the equivalent of a bank run. Certainly, the amounts of money involved in the specific frauds identified at Enron were small compared to the amount of shareholder value that was ultimately destroyed when it plunged into bankruptcy."

This is a point made by, amongest others, Malcolm Gladwell. Gladwell asserts that it was the loss of reputation and the drying up of business (as was also seen at Arthur Anderson, that destroyed Enron rather than the fraud. Gladwell also suggests that Enron SIV 'practices' were not that unusual.

Tuesday, March 18, 2008

Football and globalisation

Dan Rodrik looks at European football to draw some lessons about globallisation
"But the most important lesson revealed by the Africa Cup is that successful nations are those that combine globalisation’s opportunities with strong domestic foundations. For the winner of the cup was not Cameroon or Cô te d’Ivoire or any of the other African teams loaded with star players from European leagues, but Egypt, which fielded only four players (out of 23) who play in Europe.
By contrast, Cameroon, which Egypt defeated in the final, featured just a single player from a domestic club, and 20 from European clubs. Few Egyptian players would have been familiar to Europeans who watched that game, but Egypt played much better and deserved to win"

Monday, March 17, 2008

Bear Stearns

Here are a number of comments on Bear

The WSJ.

Felix Salmon.

Steve Waldman.

New York Times on the financial crisis.


The FT's Lex provides a good summary of the questions that are being asked of European banks:

Investors are screening banks on three main criteria. Those failing even just one are seeing their share prices head south. First, does a bank have enough liquidity to stay solvent? That means looking at its funding mix, in particular its reliance on wholesale markets, and trying to work out whether mortal damage would be done to earnings if this source of capital dried up. This is where Bear tripped up, as did Northern Rock in the UK. It is also why Lehman Brothers and the Icelandic banks are under pressure.

But even banks that appear well capitalised are being marked down because of the third screen: asset quality. This fear of further writedowns is pervasive and poor disclosure has only added to the problem. Swiss bank UBS, despite a strong capital position and a raft of profitable businesses, is the highest profile victim of such distrust

Friday, March 07, 2008

Trader at the top

Mark Thoma look at the report of the Senior Supervisors Group on practices at major financial institutions in the run up to the current credit crisis.
"The senior management teams at some of the firms that felt most comfortable with the risks they faced and that generally avoided significant unexpected losses ... had prior experience in capital markets. Consequently, the nature of market-related events over the summer of 2007 played to their experience and strength in assessing and responding to rapidly changing market developments and issues such as uncertainty in valuations. As risk issues were identified and brought to the attention of senior managers, executives in many of the firms that avoided significant losses championed robust and timely risk mitigation efforts, including executing hedges, deciding to write down exposures, and enhancing management information systems."