Reader Richard Kline is providing a mini-series that was prompted by an anonymous reader who had observed that a complex systems theory view might raise doubts about regulatory policy. Financial overseers believe that liquidity is always and ever good, but that view may be naive: Perhaps a lesson to be learned here is that liquidity […]
Read more...A year ago, I found Gillian Tett, then the Financial Times’ capital markets editor, to be the single most useful financial reporter by a considerable margin. She gave insights into areas that were important but badly neglected elsewhere, such as CDOs, credit default swaps, SIVs, all well before they entered the mainstream lexicon. She was […]
Read more...Reader Richard Kline, who provides regular, sophisticated comments, was keen to continue the discussion provoked by a post last week, “Hoisted From Comments: Greater Liquidity Produces Instability.” An anonymous reader offered a complex systems theory view of our modern financial system. The opening paragraphs: Perhaps a lesson to be learned here is that liquidity acts […]
Read more...Steve Waldman has a typically top notch post at Interfluidity,”Let’s not write the Fed a blank check,” in which he dissects the implications of the Fed’s request to Congress to pay interest on bank reserves. Waldman explains the technical workings and the pros, and gets to the real issue. This represents a change from a […]
Read more...One of our pet interests has been how the use of mathematics and models can unwittingly enable people to fool themselves. We see this regularly when working on deals. The model for the target business’ performance somehow becomes more real than the company. When the numbers don’t work, if you can come up with a […]
Read more...Below is a provocative line of thought from an anonymous reader. It supports a gut feeling that I have been unable to prove, namely, that lowering of boundaries between markets (ranging from the large number of global macro hedge funds to the large number of retail currency speculators in Japan) is destabilizing. I’ve found the […]
Read more...A page one story in the Wall Street Journal, “Merrill Upped Ante as Boom In Mortgage Bonds Fizzled,” tells the sorry tale of how the brokerage giant did so much damage to itself via a pathological disregard for risk at the very time when the mortgage markets were about to sour. The firm is still […]
Read more...Avinash D. Persaud gave a speech to the Committee of European Securities Regulators (posted at Willem Buiter’s blog) that argues that banks’ risk models and regulation based on market based pricing were bound to fail. That’s a very bold claim, yet Persaud appears to have the goods. If any of you have worked with models, […]
Read more...People never learn, as John Dizard reminds us via “Forget the past and you make the same mistakes again” in the Financial Times. Quite a few policy makers have talked up plans to use Fannie Mae and Freddie Mac as central agents in salvaging the US housing market, typically by refinancing stressed borrowers. The markets […]
Read more...This is priceless. Being an objectivist means never having to take responsibility for your actions. Greenspan has now decided to pin the financial market crisis on models. Gee, it was your Fed, Mr. Greenspan, that endorsed letting regulated entities decide how to mark and manage their derivative and structured product risks without anyone at the […]
Read more...As I am sure you all know by now, Bear Stearns started coming spectacularly unglued last night, and called JP Morgan, who in turn tapped the Fed, who sent examiners who stayed at the firm all night. In the morning, a plan was announced by which the central bank would assume the risk of lending […]
Read more...The news that Bear had to run to the Fed for help with its rapidly deteriorating cash position, and JP Morgan has been muscled into assisting in the rescue is a sign that Bear was deemed too big to fail. The Fed is lending against Bear’s collateral (I haven’t seen an estimate as to how […]
Read more...No, this isn’t a confessional by Jerome Kerviel. Instead, it’s a few excerpts of a very good paper by the Senior Supervisors Group (regulators from France, Germany, Switzerland, Britain and the United States) who went poking around 11 major financial institutions to find out how they botched their risk management so badly last year. The […]
Read more...It is truly amazing how disconnected credit instruments are from other tradeable financial investments. The Fed released the minutes from its latest Open Market Committee meeting, which lowered the growth forecast and increased the inflation forecast. That shouldn’t be cheery at all; the stagflationary 1970s were a terrible time for equity valuations, but the US […]
Read more...The pain and the costs of the dislocation in the auction rate securities market only continues to rise. In case no one has yet said this clearly enough, this product was a disaster waiting to happen. The idea that one is going to fund long term obligations in a short term funding market is nuts, […]
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