Category Archives: Risk and risk management

Guest Post: Princeton Economist and Computer Scientists Show that Derivatives Are Inherently Vulnerable to Fraud

By Washington’s Blog. As I have previously noted, credit default swaps are destabilizing for the economy. See this. And the models used to evaluate financial instruments – such as the Gaussian copula formula for CDOs – are inherently flawed. Now, Princeton University economists and computer scientists have demonstrated that financial derivatives are also inherently vulnerable […]

Bernanke Stonewalls and Prevaricates in Response to Questions by Sen. Bunning

Senator Jim Bunning gave a long, detailed, specific, and very good list of questions to Fed chair Ben Bernanke, and Bunning has posted the resulting Q&A on his website. I find this a pretty remarkable document. While a certain amount of bureaucratic jousting is to be expected (ie, there is a level of artful dodging […]

Volcker: Little Evidence Financial Innovation Has Helped Economy

Tall Paul is my hero. I would go further than he did in a speech in Sussex. The case can made that financial innovation of the OTC derivatives variety, which has mushroomed from 1992 onward, has been at best a wealth transfer device from the real economy to the financial economy, and has probably exacted […]

Will big banks now free of TARP’s shackles reach for yield?

By Edward Harrison of Credit Writedowns. When I read Yves Smith’s recent comments on Bank of America’s repayment of its TARP funds, I couldn’t help but think of a post I wrote six months ago called "Asymmetric information and corporate governance in bank bailouts." The gist is of the post is about the same as […]

More on the Miller-Moore Amendment and Unintended Consequences

Yesterday, I went after two targets in one post. The primary one was Andrew Ross Sorkin, who despite the considerable reporting and storytelling skills he demonstrated in Too Big Too Fail, seemed unable to keep a heavy-handed pro-Fed posture out of an article yesterday on the Paul-Grayson-DeMint bill, which more popularly goes by monickers like […]

Guest Post: Senator Dodd has Introduced a Sweeping Financial Reform Bill. Please Help Me Figure Out If Its Good or Bad, and What Its Missing

By George Washington of Washington’s Blog. A source on the Hill sent me the following summary of Senator Dodd’s proposed financial reform bill. My source notes: The summary leaves out Sections 1201-1204, which contain serious changes to the Federal Reserve bank structures, transparency elements, and restrictions on 13(3). Comments and observations are always welcome. Dodd […]

Einhorn: First, Let’s Kill All the Credit Default Swaps

David Einhorn, who enjoys his considerable reputation for hard-fought battles against firms with shaky finances and dubious accounting (Allied Capital and Lehman), has taken aim at a new and equally deserving target: credit default swaps. In an interesting bit of synchronicity, Einhorn’s comments in a letter to investors overlap to a considerable degree with a […]

Bullish data, recoveries, crashes and the psychology of forecasting redux

By Edward Harrison of Credit Writedowns If you have been wondering whether a statistical recovery is at hand, today’s ISM manufacturing report should be the clincher. The report was definitely bullish with the ISM index rising to 55.7 and sub-components supporting the understanding that the manufacturing sector is expanding. This is quite a contrast to […]

Guest Post: Galbraith Says Administration’s Sole Goal is to Restore System of 5 or 10 Years Ago, But Confidence Won’t be Restored Unless Fraud Which Caused the Crash is Investigated

By George Washington of Washington’s Blog. As I have repeatedly written, the largest U.S. banks have repeatedly gone bankrupt due to wild speculation which was blessed by the Fed, and then the government covered up their bankruptcy. Indeed, the New York Times writes today about one of the too big to fails: Over the past […]

Guest Post: Congressmen Grayson, Clay and Miller Introduce CFPA Amendment to Help Reduce Looting

By George Washington of Washington’s Blog. Congressmen Grayson, Clay and Miller are introducing an amendment to the Consumer Financial Protection Agency bill: Today we will offer the “Financial Autopsy” amendment. The Grayson/Clay/Miller amendment is essential to attacking the root problem of consumer bankruptcy and foreclosure because it requires the CFPA to do a financial audit […]

Guest Post: The Ongoing Cover Up of the Truth Behind the Financial Crisis May Lead to Another Crash

By George Washington of Washington’s Blog. William K. Black – professor of economics and law, and the senior regulator during the S & L crisis – says that that the government’s entire strategy now – as during the S&L crisis – is to cover up how bad things are (“the entire strategy is to keep […]

Guest Post: Credit Default Swaps – Love ‘Em, Ban ‘Em, or Tax ‘Em?

(Yves should be back – and so the site should return to normal – tomorrow. If all goes according to plan, you’ll be hearing a lot less from me for a week or so. Yves’ book – Econned – will be quite valuable, and so well worth the wait. ) By George Washington of Washington’s […]

Guest Post: Satyajit Das on Dr. Jekyll and Mr. Hyde Finance

By Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives: One year ago, AIG was brought to the brink of bankruptcy as a result its exposure under credit default swaps (“CDS”) (a form of credit insurance). Asset backed securities and Collateralised Debt Obligations […]

Party Time! Wall Street Back to Its Old Highly Levered Ways

Bloomberg reports that Wall Street is back to its free-wheeling, high-levered ways. This is a classic example of moral hazard in action. Why worry about blowing up the bank when you know the taxpayer will bail you out? From Bloomberg (hat tip DoctoRx): Banks are increasing lending to buyers of high-yield company loans and mortgage […]