Bloomberg has a fantastic article today about how Lehman’s decaying corpse is suing a bunch of former clients, many of them wee and sympathetic nonprofits, who hosed Lehman when they terminated swaps in September 2008. Some of these lawsuits turn on disputes over when those clients, or their consultants, should have valued the swaps for termination purposes, and I was looking forward to reading Bloomberg’s account of which of those customers used the SWPM <go> function on their terminals and on what dates, but for some reason that wasn’t mentioned.
The basic story is that clients had trades with Lehman that were in-the-money to Lehman, and when Lehman went bankrupt the clients terminated the trades and wired Lehman termination payments that Lehman now rather belatedly finds inadequate. You could understand why the clients would want to get out of these trades: for one thing, the trades had moved against the clients (thus being in-the-money to Lehman) and seemed likely to move further against them1; for another, if the trades did move back in the clients’ favor, what were the odds that a freshly bankrupted Lehman would pay the clients what they were owed?
Is Lehman right that the clients underpaid? Oh, I mean, of course. I don’t have the details of the trades but you can reason this out from first principles. Here:
- It’s September 15, 2008, and Lehman has just filed for bankruptcy.
- You owe Lehman some money.
- How much you owe them is a somewhat subjective matter that depends on what termination date you pick, what model you use, whom you ask for a quote, etc.
- You know, with some certainty, that everyone at Lehman who knows anything about your trade, and also everyone who doesn’t, has bigger things to worry about, like stealing office supplies on their way out the door.
- You can basically write them a check and enclose a note saying “here’s what we think we owe you,” and see if they write back.
- How big is the check?
It’s not just Jeffery Gundlach’s daily pleas for a
I confess that I have not followed the swap-futurization thing closely but my assumption was that the politico-regulatory view was:
- Swaps are evil instruments of financial instability and fraud and should be discouraged, and
- Listed futures are mostly harmless.
You can have various objections to this preference for futures,1 but surely the most compelling is that swaps and futures are to some reasonable approximation the same thing. They’re just delta-one exposures to some underlying quantity; calling them a “swap” or “future” doesn’t matter economically.
Why Should Taxpayers Give Big Banks A Subsidy of $83 Billion Per Year, Or Any Other Made-Up Number For That Matter?By Matt Levine
Bloomberg has an editorial today about how the government is subsidizing the top ten U.S. banks by $83 billion a year and maybe it should stop doing that. Because the editorial is getting a lot of attention, and because it is wrong, let’s discuss it.
Here is Bloomberg:
Lately, economists have tried to pin down exactly how much the subsidy lowers big banks’ borrowing costs. In one relatively thorough effort, two researchers — Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz — put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.
Here are Ueda and di Mauro:
[W]hen issuing a five-year bond, a three-notch rating increase translates into a funding advantage of 5 bp to 128 bp, depending on the riskiness of the institution. At the mid-point, it is 66.5 bp for a three-notch improvement, or 22bp for one-notch improvement. Using this and the overall rating bonuses described in the previous paragraph, we can evaluate the overall funding cost advantage of SIFIs as around 60bp in 2007 and 80bp in 2009.
Let’s break that down. Their paper: Read more »
Pistols At Dawn
Spoiler alert: Bové doesn’t believe BBW has the balls to respond to him. Read more »
Don’t want to jump to any conclusions here, only asking because that seems to be the case with today’s essay entitled “Whitney Falters in Trying to Repeat Success of Citigroup Call.” Read more »