Category Archives: Risk and risk management

Bear Stearns and the Vagaries of Models

We had wanted to write about the role of models and more important, model assumptions in the ongoing Bear Stearns hedge fund debacle, and Gretchen Morgenson of the New York Times, in her story, “When Models Misbehave,” provided some useful intelligence. With all due respect to Morgenson, while she touches on some dimensions of the […]

Bear Stearns Hedge Fund Fallout Continues

In case you missed it, the US stock market was rattled by the continuing aftershocks of the Bear Stearns subprime-related hedge fund fallout, with the Dow down 185, and Bear itself was down in line with the Dow (both fell 1.4%, although Bear was up slightly in the aftermarket at this hour). Now the odd […]

Gloomy Reading From the Economist on Subprime Prospects

The Economist takes a detached, often ironic, tone in its articles. So when one reads a piece that exudes worry, as this week’s “Bearish Turns” does, it’s noteworthy. The piece recites a litany of likely developments in the credit markets, all negative: the indeterminate state of the Bear Stearns subprime hedge funds; the near-certainty of […]

On Valuing CDOs

A solid piece, “Collateral value thrust to the fore by woes at Bear Stearns,” by capital markets editor, Gillian Tett of the Financial Times. It’s inherently difficult to value assets that don’t trade often (think of art), yet dodgy CDO paper has already been valued as colleteral so loans could be made against it. Some […]

Central Bankers Frustrated at Their Lack of Influence

OK, the headline may be exaggerating, but not by much. A Bloomberg article titled, “Bernanke, Trichet Turn to BIS as Markets Ignore Risk,” discusses how central bankers are finding the Bank of International Settlements an increasingly important forum for exchanging ideas and intelligence. What is distressing yet not surprising is the central bankers’ acknowledgement of […]

The Bond Market Hath Spoken (But a Lot of People Aren’t Listening)

I know we are in the midst of a classic pattern, but it is still mystifying to watch it operate. At the end of a cycle, bonds start to decline in price before the equity market starts to fall. One would think that this sequence was sufficiently well established that the time lag between the […]

"The Asian Crisis After Ten Years"

Below is an excellent post by Barry Eichengreen, Professor of Economics and Political Science at UC Berkeley, at the new blog VoxEU. The post posits that the biggest risk to Asia is an asset crash, and looks at America’s experience during its industrializing phase to see what lessons might be learned. He determines that whether […]

"What Hedge Funds Risk"

A good article in the American Prospect by Barbara Dreyfus gives an overview of the state of play in the hedge fund industry and reviews the causes (considerable) for concern. The article is very much for the generalist reader and misses some points that are important (for example, the role of leverage in most hedge […]

CDOs: Whistling in the Dark

We have mentioned before that the CDO market, a dark, murky, but rapidly growing part of the financial markets, is looking dodgier by the day. A brief primer: CDOs resemble other structured credits, like mortgage backed securities, in that they are structured into tranches of varying credit quality and maturities. The top tier is often […]

Troubled Bear Stearns Hedge Fund May Be Liquidating

When the story broke of trouble at a Bear Stearns hedge fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, that led it to auction $4 billion of its holdings to raise cash, we speculated that this might wind up being the beginning of a liquidation. That scenario now appears likely. The Wall Street Journal […]

Is (the Perception of) Risk Returning?

Many moons ago, we lamented, “Where Has the (Perception of) Risk Gone?” Even though the markets got religion for a couple of weeks after the global downdraft of February 27, things returned surprisingly quickly to status quo ante. Over the last week and a half, we seem to have had a mini rerun of February […]

More Warnings About Bridge Loans

The funny thing about the oft-repeated George Santayana saying, “Those who cannot remember the past are condemned to repeat it,” is that it is generally applied to historical events, like the folly of launching an attack on Russia that might extend into the winter. But these days, in the financial markets, with so many people […]

Martin Wolf on Savings Glut Vs. Money Glut Hypotheses

Martin Wolf, in a Financial Times comment, “Villains and victims of global capital flows,” looks at the two competing theories of the causes of global imbalances. One is the savings glut story, in which parsimonious Chinese and Japanese force the US to consume to keep the world from falling into recession. This view is favored […]