Category Archives: Risk and risk management

“Summer” Rerun: Welcome Willem Buiter and Mohamed El-Erian to the Banana Republic Club!

The time has come to announce the formation of the Banana Republic Club. Membership is open, with the sole requirement being that nominees correctly discern behaviors in advanced economies that resemble those of corrupt developing countries, which for sake of convenience are referred to as banana republics. Members are eligible to receive a Carmen Miranda hat, although they are not required to wear it.

Brad DeLong has his Ancient and Hermetic Order of the Shrill. Why should he have all the fun?

On the Gutting of Financial Services Reform

Bloomberg has a well done but disheartening account of the watering-down-to-meaninglessness of financial services industry reform, with the case example being Basel III. Basel III is the latest iteration of capital standards for banks, which is hoped to be implemented more or less true to form by various national bank regulators. Richard Smith has been ably covering the substance of this beat (see here and here for earlier posts) and the details are indeed more that a bit convoluted.

However, Basel III has been touted in the US as the fix for the shortcomings in bank reforms such as Dodd Frank. As Treasury argues, if banks have more than enough capital, you have a lot of room for error on other fronts. But Basel III preserves too many bad ideas of its predecessor, Basel II, such as risk-weightings for various types of assets that lend themselves to gaming; along with risk weighting, a preservation of the problematic role of unreformed rating agencies; allowing big banks to use their own idiosyncratic and often widely varying risk metrics; an obsession with the asset side of the balance sheet, and not enough to the way that liabilities can also blow out when asset prices are under stress.

The British Mess (III): Bank of England Tiptoes Around Sovereign Risk Worries

By Richard Smith The latest Bank of England Financial Stability Report is worth decoding. My last post on the UK sketched a scenario in which the very large 2011 funding programme for UK banks, discussed in the June BoE FSR (back issues all available here), could be quite problematic, in adverse markets. I hinted that […]

Another Day, Another Rating Agency Fail, This Time S&P

f you thought that the rating agencies had cleaned up their act in the wake of the crisis, think again. Our Richard Smith reported on a couple of black eyes by Moody’s, one a rather implausible 180 degree turn on its take on the US tax deal, the other a suspiciously flattering take on whether Countrywide had indeed transferred notes (retaining them, as an executive testified they did on a routine basis, would confirm our suspicions about widespread problems in the securitization industry.

Now we have a big blooper by S&P, this one in the form of mass rerating, based on an admitted faulty analysis. That is code for “big error in the model that everyone missed.”

Banks Desperate for Profits Seek Out Risky Credit Card Customers

anks, having trashed their once-sound model for the credit card business, are back trolling to find credit junkies, albeit of a somewhat safer type than the ones that blew up on them in the credit crisis.

Back in the 1980, the credit card industry, despite being more fragmented than now, had what looked a lot like oligopolistic pricing.

On MBIA’s Suit Against Morgan Stanley on a Second Lien Deal Gone Bad

n theory, I’m a wee bit late to the item at hand, a suit by failed mortgage bond insurer MBIA against Morgan Stanley on a second mortgage deal. But in practice, I’ve not seen any commentary on it and the suit has some interesting wrinkles.

Before we get to the details, however, a general issue: looking at this case is like deciding which of Cinderella’s bad sisters is less ugly. While mortgage bond originators and sponsors did not cover themselves in glory in the later years of the subprime business, MBIA is no prize. Of all the monolines, MBIA was the most dubious. In addition to the general, and now well known problem with the industry business model, that they were running at such high leverage levels that they could not take on any real risks, MBIA has its own special cause for concern, namely a less-than-arms-length reinsurance operation. And management has major ‘tude. I’ve never read investor reports that were as haughty and obviously truth-stretching as MBIA, and thus any claims it makes about the merits of pending litigation need to be taken with a fistful of salt.

Mirabile Dictu: The Treasury Flexes Some Muscle on the Volcker Rule?

As readers know, this blog has LOOONG been a critic of the Treasury Department’s stance towards big dealer banks, both in the Paulson era and from the very get-go of Geithner’s tenure. So on those all-too-rare occasions when Treasury seems willing to meddle in a real way with the “heads we win, tails you lose” arrangement the financial services industry has managed to devise with broader society, it’s important to applaud those efforts.

Admittedly, it is premature to declare victory, but the fact that Treasury is even taking a serious stance on the so-called Volcker rule is a surprise.

The plank in Schäuble’s eye

From the look of it, the Irish bailout is taking another chunk of another one of FT Alphaville stalwart Neil Hume’s weekends. From Peston European finance ministers are struggling to reach agreement on the interest rate to be paid by Ireland for the €85bn of rescue finance it is set to receive from the EU […]

Guest Post: Will the Irish Crisis Spread to Italy?

By Paolo Manasse, Professor of Macroeconomics and International Economic Policy at the University of Bologna and Giulio Trigilia, Master’s student at Collegio Carlo Alberto. Cross posted from VoxEU. Is Italy the next European country to go? This column argues that the jury is still out, although the grace period will not extend beyond three years. […]

G20 Proposes Fig Leaf Regulatory Regime for Biggest Banks

The latest idea out of the G20, that of creating an international regulatory structure for the biggest international banks, sounds like progress but I doubt it will prove to be. Some regulators took note of the dangers posed by globe-spanning financial behemoths prior to the crisis. The Bank of England, in its April 2007 Financial […]

Lobbying to Keep the Capital Markets a Casino

Keynes, himself a successful investor, was alert to the danger of a disproportionate level of speculative activity. His oft-repeated remark: Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country […]

The Irish Mess (IV)

The domestic politics of Ireland are still on a tightrope. Their coalition government, which had has been studiously ignoring three empty parliamentary seats, has now been told by the Supreme Court to get on with it and hold by-elections for one of them, which has been unoccupied for a scandalous 18 months. The by-election is […]

A critical assessment of the Dodd-Frank Wall Street Reform and Consumer Protection Act

By Viral Acharya, Professor of Finance, Stern School of Business, New York University, Thomas F. Cooley Professor of Economics, Stern School of Business and Faculty of Arts and Science, New York University, Matthew Richardson, Professor of Applied Economics, Stern School of Business, New York University, Richard Sylla, Professor of Economics, Stern School of Business, New […]

Richard Alford: Fed Hasn’t Learned From the Crisis

By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side. Even prior to the financial crisis of 2007, economists and policymakers actively debated whether central banks should use interest […]