Wednesday, March 18, 2009

Asan financing

There is a short item in the FT looking at the short-term nature of the bank credit that has financed firms in Asia.

Of the $730bn of outstanding debt analysed in the report, 45 per cent came from banks and the remainder from bonds and commercial paper. About 54 per cent of the total debt is scheduled for repayment or refinancing by the end of 2010.

Tuesday, March 17, 2009

The future of investment banks

Another idea suggesting that banks move back to partnerships.

This might include a return to the private partnership model for investment banks. Partners would have a strong incentive to deter short-termist behaviour, and would be much more able to get their way than indirect shareholders.

Monday, March 16, 2009


Great post on CDS.

Market estimates suggest that only around $150 billion of the CDS contracts were hedges. The remaining $250-350 billion of CDS contracts were not hedging underlying debt. The losses on these CDS contracts (in excess of $200-300 billion) are additional to the $600 billion. The CDS contracts amplified the losses as a result of the bankruptcy of Lehmans by (up to) approximately 50%.

Wednesday, March 11, 2009


A Credit Trader provides an overview of what went wrong at AIG
The broad outlines of the story are the following. As part of an effort to expand its insurance underwriting business, AIG (more precisely, London-based AIG Financial Products) began writing protection on supersenior (senior to AAA) ABS CDOs. By the time lax underwriting standards led AIG to get out of this business in 2005, it had sold some $560bn of protection.

By 2007 spreads had widened enough that counterparties started to demand that AIG post collateral on the trades, which by mid 2008 totaled over $16bn. Following its first and second quarterly losses of $5.3bn and $7.8bn, AIG, under pressure, adjusted the valuation methodology for its CDO portfolio (word at the time was the company was not mark-to-marking the trades) - leading to a further $8bn writedown. On September 15th - the Monday following the Lehman default, AIG’s rating was cut, effectively guaranteeing a bankruptcy of the company. Concernerned about the effect on world markets, the government stepped in with a bailout.

Tuesday, March 10, 2009

Crash and bubble

FT Editorial
No one can read the chronicles of those earlier crashes without sensing – with a chill – that history is repeating itself. The story of the modern capitalist economy is a rhythmic repetition of cycles, syncopated by eerily similar crises. These crises, while their details differ, are but variations on the same theme. Easy money, geared up by leverage, floods the financial system through innovative products. This simultaneously pumps up asset prices and obscures their speculative nature, with euphoria usurping the place of analysis. Until, one day, something triggers a loss of confidence in the continued rise of prices, and the whole leveraged edifice crumbles.

Saturday, March 07, 2009

UK banks and the government

The government has managed to get Lloyds to increase its lending as part of the scheme to insure bad assets.

Mr Darling said the deal was a vital step in giving banks the confidence to increase their lending.

"Lloyds' commitment to lend an additional £14bn this year, on top of the £25bn committed by RBS, gets to the heart of the problems we face... by easing the flow of credit," he said.

"Restoring our banks to full health and ensuring they are able to support creditworthy families and businesses is an essential part of any plan for recovery."

Of the £14bn in lending this year, £11bn will go to companies and £3bn on mortgages.

No way out

Mr Osborne said the bank must now help revive the economy.

He told the BBC: "The real question is, are we going to get value for money?

This it not about 'value for money' it is about making sure that banks don't act in their own interest by cutting new lending (much of which looks likely to be problematic) but provide some support to firms.

Wednesday, March 04, 2009

Wisdom of crowds

The 'wisdom of crowds' idea seems often to over-state the effect of the market. It seems to suggest that there is some new or greater knowledge that is created by the interaction of an efficient market. This is only true, I think, if we consider the combination of existing knowledge into a useful package.

Felix Salmon looks at the criticism of CDS by Robert Waldmann.

In general, I think it's reasonable to say that market participants do over time change their views about such things as future earnings and default probabilities, often using often inchoate macroeconomic information, including simple anecdotal observation, rather than anything granular or specific. The change in those views is reflected in a change in market prices for stocks and bonds, and indeed the market is pretty much the only place where a large number of individual anecdotal observations can coalesce into something as quantifiable as a default probability

How useful is this? Does the benefit of real-time, quantitative measure of sentiment outweigh the negative effects of liquidity?

Tuesday, March 03, 2009

Hedge fund transparency

Mebane Faber looks at using 13F files to track fund manager actions and finds that a mini Tiger fund or a copy of Berkshire can out-perform the S& 500.


* Annualized Return: 6.5%
* Volatility: 13.2%
* MaxDD: -23.4%

S&P 500

* Annualized Return: -3.6%
* Volatility: 15.8%
* MaxDD: -44.1%