After bond fund giant Pimco’s Bill Gross gave a back-of-the-envelope estimate of a possible $250 billion in losses resulting from the impact of deteriorating corporate credit and bond defaults on the $45 trillion (notional amount) credit default swaps market, other commentators have been making improved (but still quick and dirty) calculations. One interesting effort appears […]
Read more...Wolfgang Munchau provides nice succinct overview of some of the recent debate surrounding a source of financial system risk that has suddenly captured the popular imagination: credit default swaps. For those new to the concept, credit default swaps are effectively insurance. A protection seller (think insurer) takes the risk of default on a reference entity […]
Read more...I usually rely on public information, but I’ve had two not-so-public (well, one is public but second-hand) data points converge, and they are consistent with the MSM information on the matter at hand, namely, how Morgan Stanley came to post a $9.4 billion loss on the actions of one trading desk, which in turn led […]
Read more...These days, a mere $1 billion writedown is such an penny-ante event as to not merit much interest. Indeed, what made the fact that Swiss Reinsurance Co., the world’s biggest reinsurer, lost that much on mortgage related derivatives noteworthy was the fact that it was engaged in that activity at all. It turns out the […]
Read more...Before I raise your expectations unduly, I am not saying that Ben Stein’s entire “Everybody’s Business” column today is intelligent. However, this week’s piece, “It’s Time to Act Like Grown-Ups,” had some sensible moments, and I want to give Stein his due on those infrequent occasions when it is merited. I am not parsing the […]
Read more...Royal Bank of Scotland estimated that investment banks will be forced to take $100 billion in writedowns as a result of the implementation of new accounting rules that restrict their latitude in valuing financial instruments that cannot be priced readily. Citigroup alone has $135 billion in so-called Level 3 assets, and that number rose by […]
Read more...Various analysts and reporters took keen interest in Citigroup SEC filing Tuesday that revealed that the bank had deployed $7.6 billion of a total $10 billion liquidity facility to assist its floundering structured investment vehciles (SIVs), but stated it does not believe it has to consolidate the SIVs. CreditSights estimated that Citi’s losses on asset […]
Read more...The New York Times has an odd piece today, “Where Did the Buck Stop at Merrill?” which seeks to determine whether the unexpectedly $8.4 billion third-quarter writeoff was not just former CEO Stanley O”Neal’s failing, but also one of Merrill’s board. Another shoe may be about to drop, since the Wall Street Journal claimed that […]
Read more...PhysOrg.com reports on the results of a study funded by the National Science Foundation which looked into why people decide to live in homes in risky places, like coastal Florida and areas where wildfires are common. Answer: “the emotional benefits interfere with their ability to assess the risks.” What is surprising it that this finding […]
Read more...Hedge funds charge vastly higher fees than other money managers because they allegedly deliver better investment returns. Yet when you look at most hedge fund indices, they don’t look much better, and are sometimes worse than simple long-only strategies. And remember these indices almost certainly overstate performance, since they exhibit what is called “survivorship bias.” […]
Read more...Nassim Nicholas Taleb, seasoned trader and risk manager, and author of the provocative and well regarded book Black Swans, today in the Financial Times takes on the high priesthood of modern finance. He argues that modern portfolio theory and many of its offspring, such as the Black-Scholes option pricing model and the capital asset pricing […]
Read more...A wry and informative article, “Slicing and dicing risk rebounds on banks,” by John Dizard at the Financial Times tells us that newfangled investment vehicles considered to be a good thing because it moved risk assumption away from large banks (and therefore ultimately central banks) to the wealthy. But Dizard explains the rich were too […]
Read more...In an interesting bit of synchronicity, the role of value-at-risk models has come into focus in the last couple of days. By way of background, VAR is a widely used risk management technique. It defines the level of risk by assessing the most one might lose in a set time period (typically one day) with […]
Read more...Forgive me for critiquing two Wall Street Journal articles in one evening, but the worst offender (this one) caught my eye second. It’s frustrating because this page one story, “U.S. Investors Face An Age of Murky Pricing,” attempts to explain the role of transparency, or more accurately, the lack thereof, in the recent credit market […]
Read more...The problem with being public is that your dirty underwear gets exposed, and if you are an investment bank, that means you have to talk about embarrassing losses. Morgan Stanley announced that it lost $390 million in a single day in August. And of course, it was those pesky quant traders. And even worse, Morgan […]
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