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Joshua M Brown, The Reformed Broker, The End is Where We Start From, here.
Right at the closing bell of trading Friday, Hilsenrath dropped the first of what I presume will be many hints about the Fed’s new initiative to begin cooling things off. There’s a well-worn Churchill quote that springs to mind: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
Chris Angelini, Tom’s Hardware, Core i7-4770K: Haswell’s Performance Previewed, here. OK, where do I get my Haswell server? I like the part where they say floating point is almost twice as fast (as ivy bridge) which might be important (unless you compile with gcc/AVX in which case, no change).
The integer test employs the AVX2 instruction set on Intel’s Haswell-based Core i7-4770K, while the Ivy and Sandy Bridge-based processors are limited to AVX support. As you see in the red bar, the task is finished much faster on Haswell. It’s close, but not quite 2x.
Floating-point performance also enjoys a significant speed-up from Intel’s first implementation of FMA3 (AMD’s Bulldozer design supports FMA4, while Piledriver supports both the three- and four-operand versions). The Ivy and Sandy Bridge-based processors utilize AVX-optimized code paths, falling quite a bit behind at the same clock rate.
Why do doubles seem to speed up so much more than floats on Haswell? The code path for FMA3 is actually latency-bound. If we were to turn off FMA3 support altogether in Sandra’s options and used AVX, the scaling proves similar.
Buchheit and Gulati, SSRN, Walking Back from Cyprus, here. via Salmon. A proposal to sell the uninsured depositors 5Y CDs and leave the insured depositors alone.
On Friday night, March 15, 2013, European leaders trespassed
on consecrated ground. They insisted that Cyprus impose losses –
euphemistically dubbed a “solidarity levy” — on insured depositors with
Cypriot banks as a condition to receiving EU/IMF bailout assistance.
Entering Friday’s meeting, the leaders had four options on the table, none of
them pleasant:
(i) Give Cyprus a complete bailout (estimated to cost €18
billion).
(ii) Restructure the outstanding Cypriot bonds, €4.4 billion of
which are governed by Cypriot law and €3.8 billion by
English law.
(iii) Haircut excess deposits in the Cypriot banking system;
that is, deposits in excess of the €100,000 minimum
covered by the local deposit insurance scheme. These
represent about half of the total deposit base.
(iv) Haircut the insured deposits.
The European leaders chose options (iii) and (iv). Insured
depositors will suffer a 6.75% loss on their deposits; amounts in excess of
that level will be subject to a solidarity contribution of 9.9%. Holders of
Cypriot sovereign bonds will emerge unscathed. The next bond maturing on
June 3, 2013 in the amount of €1.4 billion — a large chunk of which is reputed
to have been bought by international hedge funds over the last six months at
prices ranging from 70-75 cents on the euro — will be paid out at 100 cents
on the euro in about ten weeks. Each depositor in a Cypriot bank, large and
small, will be making a solidarity contribution toward that payment to
bondholders.
Nina Mehta, Bloomberg, Google, IBM, Nasdaq, Finra Plan Bids to Build SEC Audit, here.
Google Inc. (GOOG), Infosys Ltd. (INFO), International Business Machines Corp. (IBM) and the Financial Industry Regulatory Authority plan to bid on a project to build a comprehensive market oversight system for U.S. securities.
Lisa Pollack, Alphaville, Oh look the CDS market isn’t working again, here.
The Dutch government took the shares of SNS Reaal and the sub debt of SNS Bank and declared that they own it all now, and it isn’t clear whether this act of “expropriation” counts as a credit event according to the rules that govern CDS contracts.
On the one hand, the basic credit event sniff test passes muster: a bad thing has happened to subordinated bond holders. They are highly unlikely to get any of their investment back, though some seem determined to try.
On the other hand, nothing has actually happened in the CDS definition sense. And, even if something is determined to have happened by the Isda DC on Tuesday or something does happen in the future (such as a failure to pay interest — next payment due in May), there aren’t any subordinated bonds around to have a credit auction with, as the Dutch government owns all of them. The senior debt is trading at par, so that’s no use either.
In the last couple of years, there have been other curveball CDS cases, Greece’s sovereign debt restructuring being the biggest among them. That only ended as well as it did by chance.
FT Alphaville has written before about how the underlying issue here is that all sorts of complicated, idiosyncratic things can happen with debt, so it’s not surprising that it’s challenging to have a standardised derivative referencing credit risk.
Matt Levine, DealBreaker, Turns Out Global Regulators Are Fine With Using Credit Ratings To Decide What Banks Can Do, here.
Isn’t that strange? The argument against using ratings in setting bank capital is some combination of (A) “the rating agencies are dumb and corrupt” and (B) “credit ratings don’t measure market risk”; the argument in favor is some combination of (C) “ratings measure the risk of default – i.e. permanent devaluation of bank assets – which is really what capital is designed to guard against” and (D) “well, do you have a better idea of how to measure that?” And so there is much fulminating against giving official power to ratings, and not so much done about actually stripping them of that power in capital regulation.
Subrahmanyam, Tang, and Wang, SSRN, Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk, here.
Credit default swaps (CDS) are derivative contracts that are widely used as tools for credit risk management. However, in recent years, concerns have been raised about whether CDS trading itself affects the credit risk of the reference entities. We use a unique, comprehensive sample covering CDS trading of 901 North American corporate issuers, between June 1997 and April 2009, to address this question. We find that the probability of both a credit rating downgrade and bankruptcy increase, with large economic magnitudes, after the inception of CDS trading. This finding is robust to controlling for the endogeneity of CDS trading. Beyond the CDS introduction effect, we show that firms with relatively larger amounts of CDS contracts outstanding, and those with relatively more “no restructuring” contracts than other types of CDS contracts covering restructuring, are more adversely affected by CDS trading. Moreover, the number of creditors increases after CDS trading begins, exacerbating creditor coordination failure for the resolution of financial distress.
Matt Levine, DealBreaker, Deutsche Bank Had A Profitable Interest Rate Trading Business In 2008, here.
Again, though, I come at it the opposite way: if your business is based on manipulating rates, why are you running a matched book? There’s an intuitive plausibility to the Journal‘s basic tale of (1) bank put on big bets, (2) risk managers fretted, (3) they were reassured by traders saying “well we’ll just manipulate Libor so this bet pays off for us.” But if that was really the thinking, why not do it all the time? Why go through the effort of laying off 98% of your interest rate risk, building a mostly balanced book of long and short swaps, instead of just leaning really hard into bets on Libor going up, say, and then working the phones hard to push it up?
Danielle D’Elia, Staten Island Advance, This ice cream truck does more than serve sweets on Staten Island, here. Perfect.
STATEN ISLAND, N.Y. — This summer when the sun is hot and you’re looking to stay cool, get out into the street and call for Time Warner Cable because they are bringing back a summer favorite; the ice cream truck.
This summer, Time Warner Cable is pairing with Connect a Million Minds program in efforts to donate money to local museums, including Staten Island Children’s Museum.
Connect a Million Minds was designed to inspire the next generation of youths to connect to the wonders of science, technology, engineering and math.
The Time Warner Cable ice cream truck will be going around the city asking for donations of a dollar while serving icy cold ice cream treats. All donations will proceed to local museums to provide programs for young people that connect to math and science.
Felix Salmon, Reuters, Who is to blame for Ina Drew’s downfall? here.
Susan Dominus has a big 7,500-word NYT Magazine feature on the rise and fall of Ina Drew, featuring a couple of bland quotes from Jamie Dimon but nothing — nothing on the record, at least — from Drew herself. (We’re told explicitly about four different people who declined to comment when approached by Dominus, including “London Whale” Bruno Iksil and his boss Achilles Macris; Drew is not one of the four.)
The story, as Dominus presents it, is a tragic one. Drew was a highly competent and highly successful trader, who used her deep knowledge of the markets to stay one step ahead of the quants and the rocket scientists who coveted her job. But then she decided that she needed a group of quants and rocket scientists herself, and after she came back from her year-long battle with Lyme disease, which kept her out of the office for most of 2010, she never really regained full control or understanding of what the London office was getting up to.
Dominus actually puts forward two subtly different narratives of what went wrong. The first is that the quants ultimately managed to snow her — that in her final months at JP Morgan, Drew basically didn’t know what was going on in London, and was out of her depth:
Matt Levine, DealBreaker, Ina Drew Spent Her Whole Life Preparing To Construct A Poorly Correlated Credit Macro Hedge, here.
You’ve all peered into Ina Drew’s soul by now, right? My basic reaction was, “she kicks it old school.” This is obvious from the way that she stayed in Short Hillsafter getting rich, instead of decamping to, like, the moon, I guess? More telling, perhaps, is the fact that she seems to have been present at the creation of the idea of buying and selling financial instruments to hedge a bank’s credit risk:
Susan Dominus, NYT, The Woman Who Took the Fall for JPMorgan Chase, here. Nice reporting, nice story arc, but it is like filming all of Citizen Kane and concluding that Rosebud was the name of an unsuccessful hedge Charles Foster Kane put on in troubled economic times. Big story misses the money shot and, wow, this was the mother of all money shots. Working backwards, this is a trade that reportedly lost $5B. Experienced hitters with massive resources and yards of balance sheet like this do not drop even a small percentage that kind of P&L on a wobbly macro hedge. That is totally “a dog ate my homework” line. Without the benefit of knowing where the London Whale P&L went the only rational options are A. some sort of epic unreported undetected fraud or B. a massive prop trading quant model derailment. Given the circumstantial Gaussian Copula history, the professional background of the players, and the timing here you have to bet B. The fact that the NY Times, WSJ, Bloomberg, or FT cannot pull this story together has fascinating repercussions. One being the quantitative literacy of the financial press is apparently so modest that repeatedly saying “VaR” to them generally stops any critical thought and further line of inquiry. Kind of like saying “it” to the Knights of Ni or “cdo” to NYT Finance reporters. Lisa Pollack where are you?
The trouble that eventually ended Drew’s career at the bank started out, the bank argues, as a precaution, the same kind of precaution, in fact, that set her on a successful career path at Chemical Bank: a major hedge against the possibility of a credit crisis.
Back in 2007, the bank asked the London office to execute a credit derivative hedge that would protect the bank in the event of a major crisis. (Some credit derivatives are, essentially, a bet on an outcome, like a corporation or government defaulting on their financial obligations.) The hedge not only protected the bank but also made money in 2008 when the markets collapsed.
Following the crisis, the team in London, including Iksil, continued to expand the position. (A credit trader’s position can be thought of as a collection of bets on outcomes.) Iksil’s position was eventually so large that he became known as the London Whale before his identity was confirmed. At some point in December of last year, a former executive from the group says, Drew checked in with Macris and Martin-Artajo about the position while the two men were in New York. They answered, but the executive, who understood the trade, remembers thinking that they did not give as full an answer as they could have. “I think they glossed over details to the point where Ina knew the product, the size they were trading, but she did not know what the true P.& L.” — profit and loss — “impact could possibly be in a stressful scenario,” he said. She was asking the right questions, he said, but did not seem to be picking up on what was not being said. Why didn’t he say anything? The usual reasons: less than total certainty, resistance to jumping rank, faith in Iksil’s judgment. Plus, he liked the guy.
Katya Wachtel, Business Insider, THEY’RE BA-ACK: CDOs And CLOs Are Popular Again As Investors Go On A Chase For Yield, here. I read last week that the head of CS Structured Products was charged with mismarking his book. He won’t be the last structured guy to go down. The London Whale reloaded on CDX tranches, what like a year ago? So it is about time to rack them up again. This is what folks know how to do to manufacture risk and yield, so not that surprising. Maybe you can wrap them (CDOs and CLOs) in an ETF so they have a different name and trade on an exchange. High Frequency Repackaged Exchange Traded Corporate Bond/Loan Collateralized Debt Products, say it three times fast and the Themis Trading boys will just get their own show on CNBC Tee Vee.
“If you’re willing to go out more into more illiquid, structured or complex trades, there’s more opportunity, and potentially mid-teen returns,” said BlueMountain co-founder Stephen Siderow.
BlueMountain is even venturing back into CDOs, the much-maligned investment product that became synonymous with the housing bust and the financial crisis. In March, the hedge fund, purchased a portfolio of synthetic collateralized debt obligations, from French bank Credit Agricole.
The firm’s flagship $4.8 billion BlueMountain Credit Alternative fund rose about 12 percent in the first eight months of this year.
The search for yield is understandable with the benchmark 10-year U.S. Treasury at 1.61 percent and government guaranteed mortgage debt – the securities the Fed is purchasing – yielding just 1.50 percent. Even corporate junk bonds aren’t so high-yield these days, with those securities yielding 6.36 percent on Friday, after hitting a record low of 5.98 percent last week.
