• News

    The Tale Of A Whale Of A Fail

    Hi! Would you like to talk about the London Whale? Sure you would. The amount of misunderstanding of our poor beleaguered beluga is staggering, so I figured we could try to embark on a voyage of discovery together. Maybe we’ll figure it out. Along the way we’ll talk a tiny bit about the Volcker Rule. […]

    / May 11, 2012 at 2:36 PM
  • News

    Let’s Worry About Bank of America’s Collateral Triggers

    I occasionally entertain myself thinking about this set of puzzles: (1) It is good for financial regulators and probably, let’s say, the world, if creditors are slow to pull money out of banks that run into trouble. In particular you don’t want everyone to want to move first and get their money out well before […]

    / May 4, 2012 at 6:39 PM
  • News

    Marvel At The Derivative On Its Derivatives That Credit Suisse Wrote To Itself

    Financial news is very serious business and you should probably fret more than you do about the economy and the banksters and the muppets and the homeowners and so forth. Some things, though, are best viewed as purely aesthetic triumphs, and your reaction should just be an appreciative whistle. This starts slow but stick with […]

    / Apr 25, 2012 at 4:33 PM
  • Banks, News

    Investors Want To Put All Their Run-Off-With-My-Money Risk In One Place

    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 […]

    / Mar 30, 2012 at 3:04 PM
  • 100511-James-Gorman


    Derivative Accomplishes Purpose And Unwinds At Market Price

    You can read the Jamie Dimon “Don’t gloat about how bad Goldman is. Did you hear me? Don’t gloat about how BAD GOLDMAN IS. The fact that GOLDMAN is BAD is of no interest to our clients. Or the press. Don’t leak this to the press!” memo two ways. One is, y’know, what it sounds like: Dimon gets to score some easy/meta points by spreading it around that his business practices are so superior that he doesn’t even need to spread it around that his business practices are superior. The other is that making money off of clients isn’t something invented at Goldman Sachs and anyone at JPMorgan who throws stones is likely to be clonked on the forehead by a ricochet. (Or possibly by a deranged fictional whistleblower!*)

    The latter interpretation is probably right for James Gorman’s more full-throated defense of Goldman because whoops:

    / Mar 16, 2012 at 12:36 PM
  • News

    Greek Debt Management Guy Thought His Partners In Obscuring The National Debt Would Be The Last People To Rip Him Off

    Bloomberg’s story about the Greece-Goldman swap-debt-whatever kaboodle, so let’s talk about the philosophy of derivatives for a minute. First the story:

    Greece’s secret loan from Goldman Sachs Group Inc. (GS) was a costly mistake from the start. On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.

    There are at least three reasons to use derivatives. First you could be into some actual informed shifting of risks from those who want to pay to get rid of them to those willing to be paid to bear them, or from those who have Risk X and want Risk Y to those who etc. Boy are there a lot of textbooks that talk about this. And I suppose it even happens sometimes. You could imagine that a vanilla interest rate swap entered into by a corporation on its bonds or credit facility could qualify as this. I guess people who trade listed options to do covered-write strategies or speculate on takeovers or whatever fall in this category, maybe modulo the “informed.” (Sometimes!)

    Then there’s tax and regulatory arbitrage. This is time-honored and much of it, particularly the stuff with the best names, is focused on tax dodging, but there are also various other regimes – securities laws, accounting, whatever – that you might want to get around with derivatives. Paying $10 for CDS with a maximum payout of $10 purely to lower your capital requirements is a recent amusing/egregious example.

    The thing that wasn’t mentioned in the CFA Level I derivatives primer is principal-agent arbitrage. This is … first of all, let’s say this isn’t a derivatives issue, or a financial-industry issue, it’s like a life issue. (Some would say it’s why there’s an M&A business, for instance.*)

    But it’s also a derivatives issue! And you can see why if you’re as baffled as I am by the Bloomberg story. So this:

    / Mar 6, 2012 at 6:48 PM
  • Basel. Where the BIS is. I'm getting more and more into soothing photos of architecture. Enjoy!


    BIS Paper Reminds Us That All’s Well In The Derivatives Market

    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 […]

    / Mar 6, 2012 at 3:44 PM
  • News

    New Rules May Prevent Banks From Blowing Themselves Up For Cheap

    If you’re in a certain line of work, and I bet you are, then your main concern about things like the Volcker Rule and increased capital requirements for banks is that they might reduce your comp. If you’re in that line of work, you’re also probably the sort of person who has a higher than […]

    / Feb 8, 2012 at 3:46 PM
  • Banks, News

    Paying Bankers In Derivatives Worked Out So Well For Credit Suisse That They’re Going To Do It Again

    Dealbreaker has long admired Credit Suisse for being on the cutting edge of creative approaches to compensation. In 2008, they gave bankers bonuses consisting of “toxic assets” to (1) incentivize the risk-takers to stick around and (2) remind people that “toxic assets” is a meaningless term if you don’t consider price. That worked out okay. […]

    / Jan 23, 2012 at 3:23 PM
  • News

    With A Name Like Feline Pride It Has To Be Good

    Sometimes it’s useful to be reminded that not all financial structuring is designed to get around capital requirements or defraud customers. Some is designed to get around taxes and defraud the treasury! One group of people who like to think about that kind of thing is the Congressional Joint Committee on Taxation, who took some […]

    / Dec 7, 2011 at 4:21 PM
  • CDS

    The New York Fed Is Not Buying Any Crazy CDS Conspiracy Theories

    I have a hazy memory of those exciting days in 2008 and 2009 when the world was going to be remade, shiny and new, with all of the risk gone from the financial system. The way we were going to get rid of all the risk, as I recall, was with the Volcker Rule and […]

    / Nov 23, 2011 at 2:31 PM
  • News

    In Which BoNY Mellon Maybe Understands Derivatives A Little Too Well

    Bank of New York Mellon is back in the news for offering a special promotion to its valued FX customers: if you act now, instead of screwing you with the worst possible price for your FX trades, they will not do that. OWS is working! The thing about that is … well, wait, let’s start […]

    / Nov 9, 2011 at 5:11 PM
  • News

    In Which Gretchen Morgenson Gets Credit For Understanding Derivatives

    Here’s a trade. I’ve got these bonds, see? I will sell them to you. You will pay me $100 and get $100 face amount of bonds (if you like, you can get $80 or $120 face value of bonds, depending on where the bonds are trading – but let’s make them par bonds, to keep […]

    / Nov 8, 2011 at 11:04 AM
  • News

    If You’re Not Into Greek CDS Any More, Maybe You Can Buy This Monstrosity

    We’ve noted here before the irony that Europe is both (1) screwing with your ability to get paid on CDS on shaky European sovereign debt (sort of) and (2) hoping people will buy more shaky European sovereign debt because they can get tradeable first-loss protection, suspiciously reminiscent of CDS, from the EFSF on those bonds. […]

    / Oct 28, 2011 at 1:43 PM
  • News

    CDS Levels May Not Be The All-Purpose Indicator That WSJ Thought They Were, Reports WSJ

    The New York Fed and the Wall Street Journal have both been studying how liquid the CDS market today and have released their conclusions today. Short answer: not that liquid. From the WSJ: In recent years, credit-default swaps—contracts that give the buyer the right to collect a payment from the seller if a borrower defaults […]

    / Sep 28, 2011 at 1:04 PM
  • Banks, News

    Let’s Just Go Ahead And Assume That Greek Letters = Evil

    The fact that one lovable rogue in London misplaced UBS’s bonus pool for the year has people talking again about the Volcker rule, which would ban proprietary trading at banks. I still don’t really understand that, and I’m not alone. Here is a thing about the Volcker rule and “Delta desks” (what?): Yet the definition […]

    / Sep 16, 2011 at 2:59 PM
  • News

    Goldman Would Be Happy To Take Some Correlation Off Your Hands

    Goldman Sachs Portfolio Strategy Research has a fascinating research piece out today on equity correlation markets. It does good work as a piece of research because (1) if you like equity derivatives, it’s got all sorts of fun charts and technical stuff and (2) if you don’t, it’s got a hard sell: trade equity corr […]

    / Sep 8, 2011 at 3:39 PM
  • News

    Things That May Not Blow Up The World: Derivatives?

    As Marc Faber prepares for war and Europe tries to figure out Italy, derivatives trade group ISDA wants you to know that one thing is safe: OTC derivatives. This might surprise you, since they’ve been famously called “weapons of mass destruction” and since counterparty risk in the over-the-counter derivatives market has been a big motivating […]

    / Aug 5, 2011 at 1:48 PM
  • News

    SEC: Go Ahead and Hose Derivatives Counterparties

    Many people are surprised that investment banks want their customers to buy things that they are selling. If a customer buys a bond, then the bank doesn’t own it any more – but isn’t that a conflict of interest? Wasn’t that bond designed to fail? Shouldn’t the banks only sell bonds to their customers that […]

    / Jul 15, 2011 at 4:45 PM
  • News

    Larry Fink Is Writing A Dictionary

    Efforts to create the first electronic “dictionary” defining derivatives and other financial instruments universally have moved ahead with the creation by US regulators of a committee to help develop it made up of BlackRock, the investment manager, CME Group, the derivatives exchange, and Google. Global Derivatives Lexicon Edges On [FT via HNM]

    / Jun 27, 2011 at 9:33 AM
  • News

    Blanche Lincoln’s Derivatives Provision All But Dead Now

    Blanche Lincoln’s famed derivatives legislation, which would basically prevent any big bank from ever trading CDS again, has already been chastised by Barney Frank. Now, a senior Treasury official has essentially delivered another blow to the Lincoln legislation.

    / May 26, 2010 at 4:50 PM
  • News

    Barney Frank Deals a Death Blow to Derivatives Reform

    Barney Frank just delivered a speech at Compliance Week’s annual conference in Washington D.C. and he seems to have confirmed what Goldman Sachs analysts told us yesterday – new legislation that forces banks to spin-off their derivatives business probably won’t make it into the final financial reform bill.

    / May 25, 2010 at 1:24 PM
  • News

    Blanche Lincoln Ain’t Backing Down from Derivatives Overhaul

    Sen. Blanche Lincoln, Arkansas Democrat, was able to push her controversial derivatives amendment into the financial regulatory reform bill yesterday, despite threats from Wall Street. And any banker that thinks Blanche is going to back off derivatives reform after she wins the Arkansas primary runoff on June 8 has no clue how hard-nosed she really is.

    / May 21, 2010 at 4:06 PM
  • News

    Janet Tavakoli: The Credit Crisis Was A Massive Ponzi Scheme

    Watch CBS News Videos Online

    / Feb 16, 2010 at 11:17 AM
  • News

    Citi’s Big Idea

    The guys at Citi are smarter than anyone else on the Street, which is why they are about to launch the first derivatives EVER that will pay out in the event of a financial crisis. As Chris Whalen, at Institutional Risk Analytics, told us about the news: “It’s cute. Though a bit ironic coming from […]

    / Feb 8, 2010 at 3:30 PM
  • News

    The ‘Everybody Else Was Doing It’ Strategy Fails Another Municipality

    We may now have a winner in the derivative blame game competition. Following other successful forays by municipalities, such as Jefferson County, AL, into the derivatives world, the mayor of a small Italian town that was burned by an interest rate swap pins the blame on a combination of peer pressure and the swap agreement […]

    / Jun 19, 2009 at 11:31 AM
  • News

    Derivatives World About To Get Rude Awakening From CFTC

    The word is out on the Obama administration’s plan for derivative regulation. CFTC Chairman Gary Gensler outlined the plan before the Senate Committee on Agriculture, Nutrition, and Forestry today. Derivative dealers can look forward to new rules surrounding, “capital requirements, initial margining requirements, business conduct rules and reporting and record keeping requirements.” In his testimony […]

    / Jun 4, 2009 at 4:23 PM

Our Sites

  • Above the Law
  • How Appealing
  • ATL Redline
  • Breaking Defense
  • Breaking Energy
  • Breaking Gov
  • Dealbreaker
  • Fashonista