Comments on: What Has Happened to Gillian Tett?

By: Scott

Scott — Mon, 19 May 2008 07:21:00 +0000

Hi Yves. Sorry to disagree but I am in one of those firms being referred to and Gillian is correct in what she says. There is a silo problem where the different functions do not communicate properly. Sometimes each function has a concern about a proposed product, but individually approve it. However, if you get them to discuss with one another, then you may get a different result.

If you think about it, some sales person or structurer is highly ($$) incentivised to get the product approved. Whereas the other functions are not similarly incentivised to stop dangerous products. In fact, they also lack a clear decision-making framework. If I use a risk-return framework, to make a sensible decision, I need to incorporate financial risk, reputation risk, regulatory risk, counterparty risk and so on into my decision. I can’t do that and make the trade-offs if I’m not getting all that information.
Scott

By: Tom

Tom — Fri, 16 May 2008 16:19:00 +0000

I’m afraid to say Yves that you have been giving Ms Tett too much credit in the past. On that basis I can understand your disappointment. You may (or, more likely, may not) remember that I wrote a couple of comments slating her journalism around the time that she was wrting on SIVs and CDOs. At the time I found a number of her efforts to be factually incorrect, easily recognised by anyone who has experience in the area. To her credit, she did learn about the sector by the end, but the impact of her scare-mongering (and those of her ilk) were not insignificant in the loss of confidence and associated shock waves in global credit markets. IMO, if someone else has converted to the “she doesn’t know what she’s talking about” camp, all the better. Funny how quickly people come to that conclusion when she starts to write about their specialist subject.

By: Peripheral Visionary

Peripheral Visionary — Fri, 16 May 2008 13:34:00 +0000

I could be mistaken, but it seems that Yves just called for her to engage in more dialogue.

By: bobo7874

bobo7874 — Fri, 16 May 2008 11:22:00 +0000

“A” is correct that the instrument Tett refers to is not hypothetical. In the UK, banks have sold and currently sell retail investors instruments referred to as structured capital at risk products (SCARPs) or precipice bonds, which is sort of like a bond with a yield that is juiced because the holder’s effectively getting a premium for writing a put against some equity index falling below a predetermined barrier (30%, 60% or whatever). Investors want stuff like this that offers a shot at high yield, despite the risks. Unless you have some kind of paternalistic regulator that prevents investors from buying stuff like this, someone will always sell it.

By: Richard Kline

Richard Kline — Fri, 16 May 2008 10:23:00 +0000

Though I am least of all things a lawyer, it would appear that the CDO structures were designed _specifically_ to make it difficult to litigate into them. If you get a prospectus, and buy a tranche it will, it seems certain, cost you more in billable hours than your sunk cost to squeeze a nickle out of the securities trust. This, is seems to me, twas the point: fragment, fuse, and lock diverse asset risks in an entity that spits out revenue streams, leaving any one who doesn’t like it to contest an entity without equity holders or clear title to the underlying assets. CDOs are risk-shredding machines; not risk-eliminating or risk-recycling but paper trail shredding machines. I’m sure that their underwriters see that as a magnificant innovation, don’t you agree?

By: Martin

Martin — Fri, 16 May 2008 09:10:00 +0000

A little less greed and a little more common sense might be helpful in preventing financial disasters from recurring, but I guess that would be asking too much.

By: a

Fri, 16 May 2008 07:47:00 +0000

“…investors will suffer big losses if stock markets fall more than 30 per cent….”

Just to be clear, these products exist and have been sold to retail clients in Europe.

By: François

François — Fri, 16 May 2008 07:24:00 +0000

The FT has displayed quite a lot of courage confronting the market worst practices headfront.

I have alas little doubt that this free-speech has a high cost. And that it may be receding already for some obvious commercial reason.

BoE free speech also a significant cost. But I dearly hope the City will undestand how critical it is to avoid getting in the trap Wall Street is making for itself:
-complacent press and media,
-a "business banker" (please excuse my coughing) at the head of the treasury (wrong naming by the way),
and last but not least,
-a fairly absent judicial institution.

What has happened in the CDO field deserved AT LEAST some highly visible litigation in US courts and extensive cover in international media.

International investors (excuse my coughing) will vote with their feet.

I'm sure you know that what the courageous league of outspoken bloggers you proudly belong to along with Roubini and quite a few others (read most of them) is bringing in terms of awareness will not make up for the folly of the last 4 or five years.