But opacity, leverage, and moral hazard are not accidental byproducts of otherwise salutary innovations; they are the direct intent of the innovations. No one at the major capital markets firms was celebrated for creating markets to connect borrowers and savers transparently and with low risk. After all, efficient markets produce minimal profits. They were instead […]
Read more...Bubbles are important for the country because there is nothing more dangerous and damaging to an economy than a great asset bubble that breaks. And this is something the Fed never seems to get. … We looked back as far as we could, [of the 34 bubbles we found over the years], 32 have moved […]
Read more...By Andrew Dittmer, a mathematician with hedge fund experience, and Richard Smith, a UK based capital markets IT consultant Readers of this blog are by now familiar with the incredible story of how a single hedge fund (Magnetar) managed to play a shockingly extensive role in inflating the housing bubble in 2006-2007. The story was […]
Read more...By Gonzalo Lira, a novelist and filmmaker (and economist) currently living in Chile Traditionally, the way that the Wall Street-Hollywood relationship works is, Wall Street arrives in Hollywood with much pomp and circumstance, carrying boatloads of cash to invest in movies. Hollywood—delighted with this new money—steers Wall Street towards some “premiere” and “prestige” projects. Wall […]
Read more...By Marshall Auerback, a fund manager and investment strategist who writes for New Deal 2.0. Over the last thirty years, we have steadily moved from a bank lending credit system, to one in which capital markets have become the primary form of credit intermediation. Unfortunately, our regulatory apparatus has not kept up. The result has […]
Read more...Former Citigroup CEO Chuck Prince made what could be considered the most infamous statement of this credit crisis when he said: "as long as the music is playing, you’ve got to get up and dance. We’re still dancing." –Citi Chief on Buyouts: ‘We’re Still Dancing’, DealBook, July 2007 This statement was correctly interpreted as a […]
Read more...By Tom Adams, an attorney and former monoline executive Felix Salmon at Reuters and Steve Gandel at Curious Capitalist used some of the analysis in Michael Lewis’s The Big Short as an opportunity to attempt to exonerate Goldman Sachs for the charge of deliberately constructing CDOs to go bad for their own profit. In particular, […]
Read more...Economists are often in the “it works in practice, but does it work in theory?” mode, but here we see a case where some are grappling with why some of their prized notions pre-crisis came a cropper. A clever post at VoxEU discusses why financial innovation isn’t what it is cracked up to be, and […]
Read more...A reader wrote to tell me his firm had been shown transactions at the end of 2007 from an investment bank (not Lehman) that he was confident were to tart up its balance sheet. This confirms the hardly shocking idea that window dressing was not limited to Lehman: Around Dec 2007 bank I work for […]
Read more...A post by Edward Harrison About a month ago I wrote a post called “The coming wave of second mortgage writedowns” the gist of which was that the big four banks (Citi, JP, BofA, and Wells) had a shed load of exposure to now worthless second mortgages. With many first mortgages now hopelessly underwater, it […]
Read more...By Tom Adams, an attorney and former monoline executive I’m usually cynical about these “genius of Wall Street” articles, but the Vanity Fair article “Larry Fink’s $12 Trillion Shadow” by Suzanna Andrews, about the head of the world’s largest money manager, BlackRock, raises the cliche to another level. My skepticism results both from the disconnect […]
Read more...By Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives A question of values… Derivative contracts are valued on a mark-to-market (“MtM”) basis. This requires valuation of the contracts based on the current market price. OTC derivatives trade privately. Market prices for specific […]
Read more...This came via e-mail from a savvy past client with the sign off, “Frustrated on a plane.” I like all his suggestions, and I particularly call readers’ attention to his recommendation regarding compensation reform. One thing that is striking is that the media (and pretty much everyone in DC) has fallen in with the industry-flattering […]
Read more...As readers may recall, we had argued over a series of posts that the proposed Volcker rule, to bar proprietary trading at commercial banks, did not go far enough in reducing systemic risk. While the concept was so sketchy that it was difficult to be certain what it meant, it appeared to have two serious […]
Read more...By Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives In 2007, as the credit crisis commenced, paradoxically, nobody actually defaulted. Outside of sub-prime delinquencies, corporate defaults were at a record low. Instead, investors in high quality (AAA or AA) rated securities, that […]
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