Category Archives: Risk and risk management

John Cassidy’s Shot at Bernanke’s Lehman Testimony Goes Wide of the Mark

John Cassidy, and following him, Felix Salmon. took aim at Ben Bernanke’s testimony last week at the Financial Crisis Inquiry Commission explaining why the central bank and Treasury stood aside in Lehman’s extremis. The problem is that both get two fundamental, and critical facts wrong, and that error makes the rest of their claims dubious. […]

More Evidence That Shareholder Liability Leads to Less Risky Behavior

An interesting paper at VoxEU provides some empirical support for a commonsensical observation: that the pervasive use of limited liability structures for virtually all financial services activities creates “heads I win, tails you lose” dynamics. If you have no downside and can earn more by taking risk, then why not? While bad incentives like these […]

Guest Post: Economic consequences of speculative side bets – The case of naked CDS

By Yeon-Koo Che, Professor of Economic Theory at Columbia University, and Rajiv Sethi, Professor of Economics, Barnard College, Columbia University, cross posted from VoxEU The role of naked credit default swaps in the global crisis is an ongoing source of controversy. This column seeks to add some formal analysis to the debate. Its model finds […]

Eurobank Stress Tests: A Failed Confidence Ploy

As much as this blog was a persistent critic of the US version of the stress tests, I must hand it to the folks at the Treasury: they did an impressive job of dressing up and selling a garbage barge. The combination of consistent cheerleading, extend and pretend, and a few short squeezes did wonders […]

What to Make of Banks’ Hesitance to Lend to Environmentally Dubious Projects

The New York Times reports on a welcome development: some banks are getting cold feet about lending to projects that are legal but still produce environmental damage: After years of legal entanglements arising from environmental messes and increased scrutiny of banks that finance the dirtiest industries, several large commercial lenders are taking a stand on […]

Regulators (and New York Times) Discover Bank Use of “Customer” Trades to Place Bets

The very minute the Paul Volcker, who proposed the sound idea that government backstopped banks not engage in proprietary trading, said that trades done on behalf of customers were meant to be excluded from this proposal, anyone familiar with trading could see he’d just deep sixed his idea. Proprietary trading existed LONG before banks decided […]

Guest Post: Derivatives Clearing – At the End of the Beginning

Yves here. We were skeptical of derivatives reform efforts as inadequate to deal with the product that needed to be reined in, credit default swaps, and subject to evisceration depending on how various details were sorted out. And if the types of contracts that wind up being covered are reasonably broad, the new derivatives clearinghouse […]

Summer Rerun: Martin Wolf: Banks Hold Central Bankers Hostage

This post first appeared on September 21, 2007 In an intriguing article today, “The Bank loses a game of chicken,” Martin Wolf, the Financial Times’ chief economics writer, followed the lead of the Bank of England’s Governor Mervyn King in backing down from their shared view that central bankers should be willing to let all […]

Amar Bhide on the Stalinization of Finance

Full disclosure: I’ve known Amar Bhide for roughly 25 years (we both worked on the Citibank account at McKinsey, albeit never on the same project) and although we correspond only occasionally, I continue to regard his as a particularly keen observer and original thinker. He was briefly a proprietary trader, then an associate professor at […]

Satyajit Das: Grecian Derivative

By Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall). In his “Ode on a Grecian Urn”, the English Romantic poet John Keats declared that “beauty is truth, truth beauty”. In derivatives, its seems transactions may be […]

Alford: What Kind of Science Should Economics Be When It Grows Up?

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. As far as the laws of mathematics refer to reality, they are not certain, and as far as they […]

Guest Post: Why Clearinghouses Are a Maginot Line Against Systemic Risk

As discussed in ECONNED and on this blog, clearinghouses are not a solution to the systemic risk posed by credit default swaps, since there is no way to have a CDS counterparty post adequate margin and have the product be viable (to put it more simply, adequate margin make CDS uneconomic). So for CDS, the […]

Goldman Tells FCIC 25% to 35% of Its Revenues Come From Derivatives

Is it any surprise that Wall Street went a bit off the deep end with the (admittedly barmy, but that’s a separate issue) Blanche Lincoln proposal to spin off derivatives desks? Derivatives, which are now deeply integrated in how dealer banks devise customer transactions and how they manage their own risks, are a large proportion […]

On Investor Distrust in the Markets

An article by Gillian Tett in the Financial Times, “Trading volumes retreat with investor trust,” contends that the notably low trading activity of late is a sign of deeper changes in financial markets: The most pernicious issue hanging over the system right now is a loss of confidence – not merely in the idea that the […]

Summer Rerun: Has the Credit Contraction Finally Begun?

This post first appeared on July 11, 2007 Readers of this blog know that I have been concerned about the state of the credit markets for some time. We’ve had (until the last month or so), rampant liquidity feeding asset bubbles in virtually every asset class except the dollar and the yen, tight risk spreads […]