SIFMA

We talked the other day about municipalities and the Libor shenanigans. Quick recap:
1) Municipalities wanted long-term fixed-rate debt.
2) They got it indirectly by selling long-term floating-rate debt and buying interest rate swaps from banks.
3) At first, this was cheaper than issuing fixed-rate debt.*
4) Later, though, sometimes it turned out to be more expensive than having issued fixed-rate debt, or at least more expensive than it should have been, because municipalities pay a floating rate based on weekly reset auctions of their debt and that rate tends to track an interest rate called the Sifma swap rate,** while they receive a floating rate based on a percentage of Libor, and in 2007-2008 those rates diverged in weird ways.
5) Specifically, banks messed with Libor.
6) You can imagine tons of derivatives counterparties who could get screwed without politicians getting that worked up about it, but poor beleaguered Nassau County is not one of them.

Anyway an informed reader wrote in with some comments, of which this was my favorite: Read more »

We’ve talked a bit before about the Volcker Rule and how it’s going to have creepy unintended consequences because it is really hard to distinguish “market making,” which is what bank-broker-dealers are supposed to do, from “proprietary trading,” which is evil and destroyed the world. Today we have an excuse to talk about it again because (1) Uncle Vikram sort of shrugged off a question or two on it on this morning’s Citi earnings call, though he’s not quite in the Jamie Dimon camp of “I can’t hear you there will never be a Volcker Rule shut up shut up SHUT UP”; and more relevantly (2) Stanford finance professor Darrell Duffie just put out a study saying that the Volcker Rule is going to have creepy unintended consequences because it is really hard to distinguish “market making,” which is what bank-broker-dealers are supposed to do, from “proprietary trading.” Don’t be distracted from the rightness of this study (obvs!) by the fact that securities industry trade organization SIFMA paid Duffie to write it.* Instead, let’s focus on the important questions, like: where is my $50k check from SIFMA?

Much of this paper is a full-throated, conventional defense of Grossman-Miller market-making, which is nice and will bring a tear to your eye if you’re a market maker: Read more »