“Make banking boring again” is a favorite reaction to news that JPMorgan was screwing up its VaR modelling of its attempt to get long gamma with improperly delta-hedged tranches of the CDX.NA.IG.9 and, sure, maybe, but don’t tell Treasury:
The U.S. Treasury may pool stakes in small banks bailed out during the financial crisis to entice potential investors as the Obama administration winds down the Troubled Asset Relief Program.
“Some of the investments are smaller and it may not be possible to auction them individually,” Tim Massad, the Treasury Department’s assistant secretary for financial stability, said in an interview. “So one of the things we’re looking at is pooling those investments together.”
You can see how much TARP money remains outstanding at all the wee banks at pages 240-257 here; on a quick look the smallest seems to be the $1.4mm subordinated debentures at Frontier Bancshares of Austin, TX, and there are plenty of other single-digit-millions remaining slugs of preferred or sub debt.* The notion that it would be impossible to sell something at auction for less than $50mm seems weird to me – it’s done all the time by, um, auction houses – but you get the idea: these are subordinated fixed-income instruments of small banks that have run into trouble in the recent past; the risks are significant and the potential rewards – particularly in absolute dollar numbers – may not justify the investment of time and effort to understand and bid on them. Read more »
Oh am I a sucker for this sort of thing:
This paper proposes a theoretically sound and easy-to-implement way to measure the systemic risk of financial institutions using publicly available accounting and stock market data. The measure models credit risk of banks as a put option on bank assets, a tradition that originated with Merton (1974). We extend his contribution by expressing the value of banking-sector losses from systemic default risk as the value of a put option written on a portfolio of aggregate bank assets whose exercise price equals the face value of aggregate bank debt. We conceive of an individual bank’s systemic risk as its contribution to the value of this potential sector-wide put on the financial safety net. To track the interaction of private and governmental sources of systemic risk during and in advance of successive business-cycle contractions, we apply our model to quarterly data over the period 1974-2010. Results indicate that systemic risk reached unprecedented highs during the years 2008-2010, and that bank size, leverage, and asset risk are key drivers of systemic risk.
A “theoretically sound and easy-to-implement way to measure the systemic risk of financial institutions” sounds pretty good! Is it easy to implement? Well let’s implement it to find out. [Pounds head against Google Spreadsheets.] Umm. Okay, I guess it was easy? I don’t know, I can’t fully replicate their numbers; tell me where I’m wrong in the comments. Or don’t. Read more »
You can’t possibly care about GS earnings can you? “Beat Diminished Expectations” is an elegant summary. FICC looks anemic relative to JPM and C but as Glenn Schorr of Nomura pointed out on the call some of what those guys call FICC Goldman calls “Investing & Lending” and an important principle of selling financial services generally is that non-comparability helps you so good work Viniar!
Good work Viniar generally; my favorite bit was when Schorr asked about all the recent partner departures and Viniar said basically that they were making up for lost time what with all the partner non-departures over the last four years, when it was a “tough economic environment, a tough reputational environment,” and partners – well they were so “completely loyal” that they just couldn’t leave GS in the lurch at trying times like those. This tickled me because, boy, don’t you wish you were a Goldman partner? In my line of work, when nobody was hiring and if they were hiring they weren’t hiring Goldman alums because Goldman was a vampire squid sucking the stuffing out of muppets, staying at Goldman until conditions improved was just simple pragmatism and nothing to be proud of: if you can’t get a job elsewhere, and you need a job, it stands to reason that you keep the job you’ve got. But once you’re making ten bucks a year the same behavior is the height of loyalty: since you don’t need a job anywhere, you show that you’re unbowed by the bad job environment and Goldman’s tarnished reputation by continuing to draw your partner paychecks. That seems right actually, and I promise you that I will grow many delightful moral qualities if you pay me $10 million a year. Read more »
I have nothing particularly useful to tell you about Citi’s earnings – they were good, yay, well done Vik, one day maybe you’ll be able to pay a dividend – so let me ask you some useless things. My favorite useless thing is DVA, which is the thing where if you are a bank you “lose” “money” when your credit improves and you “make” “money” when your credit gets worse, which is in some ways the opposite of right though also not, like, totally away from reality. Citi suffered thereby for its virtue:
Citigroup reported improved first-quarter earnings on Monday, with steady growth in the bank’s globe-spanning consumer businesses and a rebound in investment banking from a poor previous quarter.
Net income was $3.4bn in the first quarter compared with $3.2bn a year earlier as revenue grew just 1 per cent to $20.2bn. Those measures exclude the impact of so-called “debt valuation adjustments” – an accounting rule that makes companies take gains or losses from swings in the price of their own debt. On a reported basis, including DVA, Citi’s net earnings were down at $2.9bn.
So three useless thoughts/questions for you on that:
(1) WTF guys: Read more »
August was kind of rough for Bank of America on the legal front, to the point that we once said in Write-Offs “Everybody who hadn’t yet sued BofA did today, or will soon.” But that turned out to be wrong! Or at least, it underestimated the continuing appeal of suing Bank of America, because now not only is everyone who is not Bank of America suing Bank of America, but so is Bank of America:
[I]n Florida’s Palm Beach County alone, Bank of America has sued itself for foreclosure 11 times since late March, according to foreclosure fraud activist Lynn Szymoniak, who forwarded one such foreclosure filing, dated March 29, 2012, to The Huffington Post. … In the March 29 filing, Bank of America is seeking to foreclose on a condominium and names the condo owner and Bank of America as defendants in the suit. The company is literally seeking damages from itself in order to foreclose on the condo owner.
Ha ha ha but why is Bank of America a delinquent condo owner? Because of course it’s not; it’s the second lien holder: Read more »
What is your model of what the FSA is thinking in its insider-trading crackdown? Here is this Decision Notice against JPMorgan global ECM chairman and general mining-industry macher Ian Hannam, shown here being unspeakably awesome in Afghanistan*, and he got in quite a bit of trouble for some pretty minor badness. Basically he was advising Heritage Oil and its CEO, Tony Buckingham, on a bunch of things including (1) being acquired by another company which is unnamed but let’s just call it Acme and (2) selling a stake in itself to “Mr A, a representative of an organisation with interests in Kurdistan (Organisation C),” which, there is a part of me that thinks that the organization was actually named “Organisation C” and that the guy would call Hannam and be like “Ian? Mr. A here.” No? I refer you again to that picture.
Anyway as things got serious with Acme in September ’08, Hannam sent an email to Mr. A saying:
“I thought I would update you on discussions that have been going on with a potential acquirer of Tony Buckingham’s business. Tony, advised by myself, has deferred engaging with the client until Thursday of next week although we know they are very excited about the recent drilling results of Heritage Oil … I believe that the offer will come in in the current difficult market conditions at £3.50-£4.00 per share. I am not trying to force your hand, just wanted to make you aware of what is happening.”
Later, he sent another email to Mr. A ending “PS – Tony has just found oil and it is looking good,” and bcc’ed Mr. B, “a businessman with interests in Kurdistan,” about whom we get no further information though I’m guessing pretty much everyone named or pseudonymed here could have someone killed on 24 hours’ notice if it came to that. Read more »
Today the EU issued a discussion paper about how it plans to forcibly write down the debts of shaky banks if it ever comes to that, which for some reason is called a “bail-in,” I guess in the sense that the bailing is coming from creditors who are already in the bank’s credit rather than from taxpayers who aren’t. It’s pretty interesting, go read it, or read Bloomberg’s piece about various bits of squabbling over it and also somewhat counterintuitively a statement from EU guy Michel Barnier (left!) that “There’s a big international consensus on the principle.”
Actually there probably is; the principle is pretty sensible, which is that there comes a time in many companies’ lives where the best way to preserve value not only for the enterprise but also for the creditors is to write down some of the debt to allow the company to continue as a going concern that can pay off the rest of the debt. This is why we have bankruptcy, but bankruptcy seems to be too slow and scary for banks. The worry is, you have a bank and it’s got like $15 of equity and $100 of debt and its assets go from $115 to $90 and all of the debt holders start looking at their watches and being all “hey this has been fun but I’m actually late for this thing so would it be too much trouble for you to give me my money back?” and the bank has to sell a bunch of stuff to meet those demands then that looks like a fire sale and people figure it out and all of a sudden that $90 becomes, like, $60, and the debtholders get back 60 cents on the dollar instead of the 90 cents, and they’re like “crap, if I’d just said ‘I’ll take $90, and also whenever you have it is fine, no rush,’ I’d have much more money.”
Of course that’s all sort of obvious so one thing that the creditors could do is just not do that, and voluntarily and quickly write down their debt so that the bank wouldn’t have to have a fire sale to meet their claims, but, knowing creditors, that’s not what would happen, so you need some sort of resolution mechanism to protect them from themselves. Read more »
One way I like to imagine the world is that there’s sort of a constant amount of financial risk and entropy tends to increase, so that as time goes by everyone increasingly ends up facing the same financial risks as everyone else (though quantities and leverage vary) and idiosyncratic risk is a rare and beautiful flower and so I dropped a good portion of my net worth on Mega Millions this morning because what else can you do? Entropy increasers could include index funds, or converging bank business models, and I guess you could profitably ponder the fact that the big banks are now living on DCM fees until M&A comes back and what that could mean for a model of “we need to split up the big banks to avoid too-big-to-fail risk.”*
One thing it could mean is get the hell away from banks. So for instance you could quite reasonably be worried about putting all of your money in collateral accounts with the banks who are your derivatives counterparties because hey MF Global just lost all the collateral you put with them, and so you are, reports the Journal based on the Fed’s Senior Credit Officer Opinion Survey on Dealer Financing Terms: Read more »
This is kind of exciting: a bank won a CDO case! Or: something nice happened for UBS!
So the story goes like this (from the court opinion): in March 2002, UBS did a synthetic CDO deal called North Street 2002-4 with Landesbank Schleswig-Holstein, a German landesbank, where LSH (now called HSH, due to mergers probably caused in part by this unpleasantness) sold $500mm of protection on a $3bn portfolio “comprised predominantly of assets linked to the United States real estate market (for example, mortgage-backed securities and instruments issued by real estate investment trusts).” The protection attached after $74mm of losses (i.e. UBS bought the most subordinated $74mm of notes) and UBS could manage the stuff in the pool of reference assets:
Under the credit default swap at issue here, [North Street], as protection seller, in exchange for UBS’s agreement to pay premiums, agreed to make certain payments to UBS, as protection buyer, upon the occurrence of defined adverse “credit events” affecting securities in the aforementioned reference pool. While the securities in the reference pool were required to meet certain ratings specifications, UBS selected the initial securities for the pool, and also had the right to substitute assets in and out of the pool during the life of the credit default swap, within defined parameters and through the use of internal procedures specified in a reference pool side agreement between UBS and HSH. The governing documents required that by March 2004, 70% of the reference pool would be comprised of asset-backed securities, real estate investment trust assets, and commercial mortgage-backed securities.
The landesbanks were kind of famous for being muppets back before being a muppet was cool, and this was a pretty muppety deal. Which they’ve now figured out, and sued UBS in New York state court, claiming that UBS was selling them the deal based on the ratings of the underlying securities but actually stuffing North Street with the worst available securities with those ratings: Read more »