The gnomes at the Bank for International Settlements have produced a particularly gnomish paper called “Collateral requirements for mandatory central clearing of over-the-counter derivatives.” Wait! It might be important! Hear them out. (There’ll be charts …)
Their goal is to measure how much more cash collateral the big dealer banks will need to encumber to make the transition to central clearing of derivatives (specifically interest rate swaps and CDS) under various forms of central counterparty regime. If you’re interested in that sort of thing, and some people are, then this provides you with much fodder for chewing ruminatively. It sort of reads like an econometrics final exam that, speaking only for myself here, I would fail, so I can’t really say how ruminatively you should chew it. You could clearly make different choices at many, many different points, and while each individual choice seems thoughtful enough you wonder whether the accumulation leaves you with a toy paper at the end.*
Now, if you’re not particularly into the constraints on cash that would be driven by central clearing of derivatives, you can still get something from this paper. Specifically, this gives you a sensible look at how much damage the Financial Weapons Of Mass DestructionTM can do at any one time. Because “margin” is a proxy for something else, specifically likelihood of a big loss. Here’s how they do their math: Read more »
Despite popular perception, the financial industry isn’t actually made up entirely of “investment bankers” but rather of a whole range of people from those who work for months on years to close deals with $100mm fees that are pure profit, all the way down to people who do overnight lending of treasuries to make a spread that, annualized, is in the low-single-digit basis points. I sat somewhere in the middle and, while the M&A hitters usually had better suits, I had a suspicion that the guys shaving basis points for funding had to be more important.
Jon Corzine maybe disagreed. His prepared testimony for his filleting this afternoon has five pages talking about his ill-fated European sovereign bond bets, which conclude with a little note that all of those supposedly ill-fated bonds are doing fine, not that you cared. Then there’s some other stuff. Then there’s a page and a half about what people bought tickets for: the $1.2bn of missing customer money, which he calls by its colloquial nickname, “unreconciled accounts.” Here’s what he has to say about that:
1. “I simply do not know where the money is,” and
2. Can you blame me?: Read more »
Charles, in an “undisclosed location,” reporting: Read more »