liquidity

If anyone was considering redeeming from the fund, just slow down and think things through; you don’t want to wake up in the morning and realize you’ve made the biggest mistake of your life, walking away from all this [gestures to warehouse full of fleece apparel]. Read more »

It’s popular to say that financial markets and regulators have extremely short memories and so let’s say it about these new Basel liquidity coverage ratio rule changes out today. But not in an annoying sneery way. I mean, in an annoying sneery way, but not the obvious one.

The story is that among the post-2008 Basel mechanisms for keeping banks out of trouble is the required “liquidity coverage ratio,” which for each regulated bank:

  • tots up how much cash is likely to go out the bank’s doors in a crisis due to things like customers withdrawing deposits, derivatives counterparties terminating trades or demanding more collateral, corporate clients drawing down lines of credit, etc.; and
  • requires the bank to hold liquid assets that it could sell quickly in a crisis to meet those demands on cash.1

Virtually everything there is a term of art, but “crisis” and “liquid assets” are particularly squishy. When the LCR was first proposed it had rather harsh ideas of what sort of crisis might affect liquidity, and a rather narrow conception of what assets might be liquid enough to be sold quickly and economically in a crisis. The news today is that Basel has relaxed that approach in a number of specific ways described here and listed here; the brief version is that the types of assets that can be counted toward “high quality liquid assets” has been dramatically expanded to include a lot of corporate and RMBS debt, the assumed outflows in a crisis have been reduced, and the LCR is now being phased in from 2015-2019 instead of going into effect all at once in 2015.

A lot of people think this is a good thing, as it will reduce the already significant demands on “safe assets” and make banks a little more willing to use balance sheet to lend and stuff. As is true of everything that banks like, you can also if you are so inclined easily find people who think it’s a bad thing. There is no particularly Platonic right answer. Basically the exercise here is (1) imagine a bad situation and (2) see if the bank survives your imagined bad situation with a given mix of liquid assets; step (2) is a question of simple arithmetic while step (1) is determined entirely by the direction in which your imagination runs. There are good practical and social reasons for making your bad situation basically “2007-2008, but a little worse,” and so most of the debate is over translating that notion into liquidity outflows and asset haircuts, but if you think that that notion is conceptually suspect I can’t really prove you wrong. If aliens invaded France, SocGen’s liquidity reserve would probably not be suited to the situation.

But whatever. The jarring thing for me was this first bit of the changes to the LCR announced today: Read more »

  • 11 Dec 2012 at 1:50 PM

Markets Ruined By Too Much, Too Little Liquidity

A cool thing about financial markets is that every trade has two sides, so everything that happens, someone can complain about. “Economic growth is too robust!,” someone probably says, when it is.

Does that help explain the difference between this CNBC article about investors who are mad that there’s too much trading in the financial markets, and this Bloomberg article about investors who are mad that there’s too little trading in the financial markets? Compare these stats:

While companies raise about $250 billion a year in equity financing through IPOs and additional equity offerings, [Vanguard founder Jack] Bogle said there’s $33 trillion worth of trading going on, “which is [bad].”

With these stats:

Average volumes of bonds changing hands each day this year represent 0.29 percent of the market’s face value, according to data compiled by Bloomberg and Trace, the Financial Industry Regulatory Authority’s bond-price reporting system. That’s down from 0.32 percent in 2011 and 0.5 in 2005. …

An average of $16.93 billion of investment-grade and high- yield bonds traded every day this year as the value of outstanding corporate bonds rose to $5.72 trillion, according to Finra and Bank of America Merrill Lynch index data. … Dollar-denominated corporate bond issuance of $1.4 trillion this year is up from $1.13 billion in 2011 and surpassed the previous record of $1.24 billion in 2009, Bloomberg data show.

So … probably not, right? Just different markets. Bond volumes are famously drying up due to impending Volcker bans on prop trading, increased agita about allocating capital to trading books at banks, etc., while stock volumes are famously zoomsploding due to high frequency trading and evil speculators who are only in the financial markets to make money, the jerks.1

But if you take the numbers in those two excerpts and sort of throw them all together you get … I dunno, what do you make of this? Read more »

She recommends “suspending investing since all stocks are likely to fall now,” getting liquid, and finding a “safe haven” where you can draw the blinds and lay low until things blow over. Read more »

Every fall, previously in the basement of 85 Broad and more recently at 200 West, Goldman Sachs names a class of new partners. Blindfolded and naked, they pledge their devotion to the firm. To commemorate the event, and for the practical purpose of tagging them so their status at the firm can be quickly verified with one quick drop of trou, these newly-made partners have their nether regions dipped in a vat of gold, which harden while Lloyd Blankfein gives a speech about how to carry oneself differently once they reach the upper echelons of GS (literally, as those things will drag if you’re not careful). At the stroke of midnight, as a baby seal barks in the corner, they are inducted into the Brotherhood of the Sach. And while one is more than welcome to benefit, monetarily, from this new position, being a member of the Brotherhood is less about sharing in its huge ass profits than it is making sure the partnership stays long and strong. Some people, apparently, did not read that portion of the fine print. Read more »

  • 15 Apr 2008 at 10:30 AM

Consolidated Statement of Cash Flows


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