Category Archives: Risk and risk management

Chaos Continues in the Money Markets

The Fed’s move on Friday to lower discount rates and its policy shift towards addressing risks to growth has not brought relief to the sector that was in the most distress, the money markets. Panicked action continued Monday, begging the question of what, if anything, the authorities can do. Institutional are fleeing from counterparty risk […]

On What the Fed Hath Wrought (So Far)

A gut-wrenching two weeks in the credit markets have been capped by unprecedented moves by central bankers. The ECB’s offer of an unlimited infusion to member banks the week before last was followed last Friday’ by the Fed’s discount rate cut, which included stern warnings that those who needed it better use it and a […]

Is the Criticism of Bernanke Warranted?

A Bloomberg story, in what may be becoming conventional wisdom, charges Federal Reserve Chairman Ben Bernanke with making a novice’s error: By lowering the discount rate and issuing a statement conceding threats to the economy, Federal Open Market Committee members effectively ripped up the economic-outlook statement from their Aug. 7 meeting. Some economists describe the […]

Monoline Insurers Under Scrutiny for Suprime Exposure

Gillian Tett, in “Credit compass fails to work,” in the Financial Times, uses the woes suffered by monoline insurers such as MBIA and Ambac to illustrate that in our current subprime/housing credit crisis, nobody is sure where the dead bodies lie, which makes everyone suspect. Monoline insurers provide credit guarantees for securities. They have come […]

Fed Found, and Dismissed, Signs of High Correlation in Hedge Fund Strategies

It’s summer rerun time. By happenstance, I came across a May post, which referred to a Federal Reserve study that had found that risks of hedge funds pursuing highly correlated strategies appeared, by some measures, as high as before the LTCM crisis. We had thought the Fed might be making a mistake in dismissing its […]

Asset Backed CP Yields Move Higher

Even though the Fed cut the discount rate to 5.75%, and more important, said it was concerned about risks to growth, asset backed commercial paper, which is the epicenter of the credit shock, is being placed at newly high yields: 5.99%, which is now above the discount rate. And remember, not only has the Fed […]

On Fragility of the Financial System

Fragility seems to be the word on everyone’s lips today. As reported in the Financial Times, UBS market strategist William O’Donnell said that the commercial paper markets had dried up and, “Now the buyers are only interested in Treasury bills.” Overnight, Rams, an Australian home lender that, while not exposed to US subprime, had been […]

Moody’s Warns of Potential for LTCM Type Hedge Fund Failure

According to Bloomberg, Moody’s has altered investors to the possibility of a repeat of the 1998 Long Term Capital Management hedge fund crisis. We should be so lucky. As we have said before, the LTCM crisis has been widely, and in our opinion, mistakenly seen as a vindication of the workings of the financial system. […]

Why So Little Comment on Dr. Doom’s Latest?

I am more than a bit late to this item, namely, an op-ed piece, “Our Risky New Financial Markets,” by Henry Kaufman in the Wall Street Journal on Wednesday. I’m puzzled at the lack of commentary on this article in the blogsphere. Kaufman, as chief economist of Salomon Brothers during its heyday in the 1980s […]

Nouriel Roubini on Risk Versus Uncertainty

Nouriel Roubini, on his RGE Monitor, discusses the distinction between risk (variability in outcomes that can be estimated) and uncertainty (unknown or unmeasurable outcomes). Risk can be priced; uncertainty can’t (or at least can’t be priced by rational agents). Roubini argues that part of the panic in the markets stems from the fact that investors […]

The Journal Tells Us About Rating Agency Conflicts Now?!?

This is priceless. The Wall Street Journal, in a page one story, “How Rating Firms’ Calls Fueled Subprime Mess,” tells us that rating agencies might have had more than a little bit to do with the problems in subprime. This is a new item? A page one news item? It would be a bigger news […]

Andy Xie Criticizes Central Bank Liquidity Infusion

Andy Xie, who until last year was Morgan Stanley’s chief Asia economist (he apparently made himself unpopular by being too candid about Singapore), gives a blunt critique of last week’s liquidity infusions by central bankers in “It’s time for central bankers to stop bailing out markets” in the Financial Times. Xie’s conclusion is that the […]

"The Central Bank as Market Maker of the Last Resort"

An excellent article by Willem Buiter (Professor of European Political Economy at the London School of Economics and formerly a member of the Monetary Policy Committee of the Bank of England and Chief Economist at the European Bank for Reconstruction and Development) and Anne Sibert (Professor and Head of the School of Economics, Mathematics and […]

Goldman’s Non-Bailout Bailout

Goldman, in a brilliant bit of legerdemain, invested (along with partners such as CV Starr and Perry Partners) $3 billion into its troubled quant fund Global Equity Opportunities. From its press release: Many funds employing quantitative strategies are currently under pressure as recent conditions have resulted in significant market dislocation. Across most sectors, there has […]

ECB Provides Emergency Cash for Third Day

The Financial Times indicated today that European banks were willing to provide commercial paper only on an overnight basis to a relatively lengthy list of names they regarded as under stress. That is a dramatic departure from normal market operations. Accordingly, the European Central Bank has found it necessary to infuse funds for a third […]