Thursday, October 30, 2008

Insider coup

A great story about incorporation of information and insider trading from Ray Fisman at Slate.

Wednesday, October 29, 2008

Icelandic banks

Willem Buiter and Anne Sibert at VoxEU report on the Icelandic banking system

With most of the banking system’s assets and liabilities denominated in foreign currency, and with a large amount of short-maturity foreign-currency liabilities, Iceland needed a foreign currency lender of last resort and market maker of last resort to prevent funding illiquidity or market illiquidity from bringing down the banking system. Without an effective lender of last resort and market maker of last resort – one capable of providing sufficient liquidity in the currency in which it is needed, even fundamentally solvent banking systems can be brought down through either conventional bank runs by depositors and other creditors (funding liquidity crises) or through illiquidity in the markets for its assets (market liquidity crises).

Two points: the foreign currency nature of banks' assets and liabilities; the categorisation of new sources of pressure for lender of last resort activity.

Saturday, October 25, 2008

Fancy Financing

Just to show that financial games are not the sole preserve of anglo-saxon investment banks, the FT looks at the Porsche take-over of VW.

VW’s share price was squeezed to such heights that it became the 11th biggest company in the world, worth more than other European and US carmakers combined. Absurd. Even more absurd is that this false market is legal in Germany. Stranger still is that Porsche and its managers – even though VW’s share price has fallen – may well have made money from it all. Last year, the company earned €3.6bn from option operations – some three times as much as from cars – profits that will help it buy VW. Porsche used to be the emblem of a go-go City trader. Now it has become one.

Fancy financing and outsmarting the hedge funds!

Friday, October 24, 2008

Banks and capital

John Kay

Banks would normally be wary of lending to someone whose liabilities were 50 times their net assets, but they happily lent to each other on that basis – until, one day, they stopped. If you want a one sentence explanation of the present crisis, that is it.

Friday, October 17, 2008


Paper on governance in finance.

This is also a theory of the financial crisis. As long as the Wall Street investment banks were partnerships, the young guys who looked forward to becoming high-paid seniors disciplined the firm: they did not want it to blow up before they had their turn in the cushy chairs with the soft cushions. But once you go public, the juniors no longer care so much about the survival of the firm--and the seniors have nobody checking to make sure they are not selling lots of out-of-the-money puts and calling it alpha.

Wednesday, October 15, 2008

Sell at the low

The FT reports that a record $65bn was pulled out of US mutual funds in the week to Friday 10th October as the panic over banking reached its peak.

Thursday, October 09, 2008

A Carry Trade?

UK local councils have exposure to Icelandic banks. Why? High interest rates. Why?

The Telegraph

However they are also encouraged to look for banks promising high interest rates, which is why nearly £1billion has been trapped in the Icelandic banks

Icelandic banks were presumably prepared to pay more for UK deposits because they could convert it to ISK and lend it out for a much higher rate. This is the money that fueled the purchase of UK assets like....West Ham United (now frozen?).


Vernon Smith in the WSJ

- A "liquidity crisis." In every market, there is ultimately only one source of liquidity: buyers. And this is what central bankers hope to see return when they speak euphemistically of "restoring confidence."

Smith, who has done a lot of work on the design of markets, says that the government expertise is in selling homogeneous assets (tbills and bonds) to multiple buyers, rather than being the buyer of heterogeneous assets (where the sellers have much more information about quality than does the buyer).

Sunday, October 05, 2008

German banks

The practice of borrowing short and lending long has a suitably ugly term in German: Fristentransformation. Mr Funke will probably rue the day he embraced it.

Friday, October 03, 2008


The Guardian looks at the problems at Wolfson where the failure to win an order from Apple for the latest iPod touch and iPod nano devices.

Wolfson had already embarked on cost-cutting measures in response to an earlier downturn in business, shedding 22 jobs. Among those who left in September was Dave Shrigley, the chief executive, who was replaced by Mike Hickey from Motorola. Shrigley said that he was leaving for family reasons.

Wolfson designs and develops semiconductor products which are then made by third parties in Taiwan and China. It specialises in performance mixed-signal integrated circuits which are used to convert analogue signals into digital for storing and processing information. Wolfson will report its interim financial figures later this month.

Contrast this to the on-going Chinese attempt to prevent iron-ore producers getting more market share and News International buying the set top box operations of Amstrad.

Thursday, October 02, 2008

Covered bonds

Covered bonds explained

Covered bonds are secured on a pool of mortgages but crucially also carry a guarantee from the issuing bank to protect investors if the mortgages turn bad. In the UK, this guarantee counts as a senior unsecured liability that should rank equally with other senior unsecured debt. Meanwhile, shareholders emphasised that the bank was solvent and that they should see some residual value.

CDS exchange

The FT looks at the conflicts involved in the creation of a central clearing facility for CDS.

Mark Yallop, chief operating officer of Icap (a shareholder in TCC), says: “The dealers have a choice about where they clear their OTC credit default swaps. But it probably isn’t in their longer-term interests for these to be cleared on an exchange-owned clearing platform because that exchange could, potentially, use the open interest thereby created in its clearing house associated with the dealers’ OTC contracts as a basis for launching exchange-traded CDS contracts. Such a development would undermine dealers’ OTC franchises.

Wednesday, October 01, 2008


The FT reports on the manouvering of the LSE to prevent new upstart exchanges trying to use its liquidity and depth to support their activities.

Nasdaq OMX Europe has hired Citi to provide an “order routing” service that takes any orders that cannot be fulfilled on Nasdaq OMX Europe’s order book and seeks out a market where they are more likely to find matches – including the LSE and other alternative platforms.

In response, the LSE now plans to introduce a way of distinguishing between orders that come straight through to the exchange and those that arrive through order routing from competing platforms. It will then charge a different tariff for orders that arrive from a competing platform.