Category Archives: Risk and risk management

Best Securities Reform Proposal

I am kicking myself that I didn’t come up with the proposal made by Brandeis professor Stephen Cecchetti in today’s Financial Times. His opinion piece, “A better way to organise securities markets,” is the single best idea for securities reform I have seen in a very long time. It is simple, elegant, and addresses many […]

"What Happened to the Quants in August 2007?"

Paul Kedrosky (of Infectious Greed fame) points to a a terrific paper by Amir E. Khandaniy and Andrew W. Lo of MIT, “What Happened to the Quants in August 2007?”. I’ll confess that I have only skimmed it, but it looks thoughtful, has all the right caveats (the researchers admit they may not have and […]

UBS: Latest Credit Market Casualty

The Wall Street Journal has broken the story that UBS will announce that it is writing down its fixed income book as much as 4 billion Swiss Francs, or roughly $3.4 billion, which will result in losses of 600 to 700 million SFr for its third quarter. Although this write-off is greater than those taken […]

Dizard on the Uses and Misuses of Financial Models

John Dizard of the Financial Times looks at the role of financial models in the recent market perturbations and argues that most observers are making the problem seem more complicated than it actually is. First, some firms had systems that were designed unduly for the convenience of the traders, and it proved way too easy […]

Martin Wolf: Banks Hold Central Bankers Hostage

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 but those banks “too big to fail” go […]

The Journal Tells Us Quants Have Suffered

Readers have probably figured out that I think the reporting in the Wall Street Journal is overrated. We have a prime example on page one today, “How Market Turmoil Waylaid the ‘Quants’.” My understanding is that newspapers are in the business of providing news. The story that the quants are in trouble is a month […]

The Barriers to Bottom Fishing

John Dizard, in today’s Financial Times, tells us why, despite the fact that a lot of fixed income paper is on offer at very cheap prices, no one seems to be stepping to the plate. And his explanation bodes ill for things turning around very soon. The simple story is that even though the buys […]

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. […]