Even though the US Treasury market has taken a nasty downward move through an important level that many participants see as the beginning of a bear market in bonds (which will inevitably lead to a bear market in equities), actors in other sectors of the financial markets seem remarkably sanguine, at least so far. Is […]
Read more...What the Fed and the Treasury would like take away, the SEC gives, and then some. The Fed is (finally) getting worried about systemic risk, and in this Financial Times story, the Treasury Department (which usually stays clear of this sort of thing, generally deferring to the Fed) says that it is concerned about hedge […]
Read more...Readers may notice today that we are a bit heavy on Financial Times stories. In part, that’s because the FT has a healthy respect for the fixed income markets. Political consultant and pretty scary guy James Carville once remarked, “I used to think if there was reincarnation, I wanted to come back as the President […]
Read more...Michael Panzner pointed us to a Bloomberg column by John Berry, “Fed Officials Fret Another `Russia’ May Occur.” Frankly, we are delighted to read this. It is high time the Fed woke up and took stock of the excesses taking place in virtually every asset class. Not only do we have very high liquidity, asset […]
Read more...A very good post by Roger Ehrenberg at Seeking Alpha, “OTC Derivatives: Risks and Rewards,” which explains that the over the counter derivatives business poses a risk, perhaps a significant risk, to the Wall Street community. For the benefit of readers, over the counter derivatives are those that are not traded on an exchange. Recognize […]
Read more...One of Wall Street’s ongoing pin-the-liability-on-the-chump exercises is finding purchasers for the riskiest (often called “equity”) tranches of asset backed securities and CDOs, which in the trade are called “nuclear waste.” They come about because the attractive upper tranches get priority in the distribution of cash flow and may also be overcollateralized or credit enhanced. […]
Read more...Thanks to Felix Salmon for pointing this tidbit out to us. Due to leveraged buyouts (notice how the press has started to use that 1980s term once again?), there has been a surge in junk issuance. But since below-investment-grade issuers pay only about 180 basis points more than investment grade issuers, there is virtually no […]
Read more...We have Mark Thoma to thank for pointing out this story on research by Nancy Wallace at the Haas School (UC Berkeley). She found serious deficiencies in the risk models used by banks to evaluate residential mortgages and predicted widespread problems a year before the subprime meltdown. She and her colleagues have just completed a […]
Read more...As I have mentioned before, this blog relies a bit more than I’d like on the Financial Times because its writers have a greater understanding of the inner workings of the financial markets and take a jaundiced view of recent developments. One has to wonder if the two traits are linked: if you have a […]
Read more...Unlike its US counterparts, the Financial Times has consistently been on top of the various unsavory elements of the credit market bubble: the near disappearance of risk premia, the growth of leverage on leverage, the lack of investor sophistication. A piece by John Plender does a very good job of connecting some of the dots […]
Read more...Although it’s the Dow’s new highs that get the headlines, the really speculative action is taking place in the debt markets. As we have discussed in past posts, lenders and bondholders have abandoned their customary caution and are accepting yields that many feel are inadequate for the risks involved, and are also waiving customary covenants, […]
Read more...The Financial Times appears to have scooped the Wall Street Journal, Bloomberg, and the New York Times on a Bank of International Settlements report due out today, which says that investment banks are too cozy with hedge funds and that isn’t very good for the financial system. The BIS report calls for greater disclosure of […]
Read more...Michael Panzner of Financial Armageddon provides a nice synopsis of the oft-unappreciated adverse consequences of securitization. One element that is not inherent but seems inevitable is that the profits in the transaction are front-loaded, taken more as fees and less as spreads over the cost of funding over the life of the transaction. As he […]
Read more...The question of systemic risk, that is, the possibility of a generalized failure of the financial system, such as a stock market crash, is something that regulators think about a great deal and quite deliberately discuss a good bit less, since fear becomes a driving element in any market panic. The reason for the heightened […]
Read more...Bernanke normally adopts a measured tone and, as befits someone whose words can move markets, takes great care not to dwell too heavily on bad news. So it was suprising to see him issue a fairly pointed statement on risks to the banking system. His remarks on the perils of private equity loans, when taken […]
Read more...