You are currently browsing the tag archive for the ‘Credit’ tag.
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.
What’s more, the debt that Elliott holds was not, in any real sense, “forced onto the Argentines by dictators”, and the case is not “rooted in the bloody dictatorship that ruled from 1976 to 1983″. Yes, the junta ran up a lot of debts — and Argentina restructured those debts in its big Brady deal of 1992. By the time the junta-era debts had been restructured, Argentina’s debt was an entirely manageable 30% of GDP; even two years later, in 1994, it was just 31.4% of GDP. It was only in the late 1990s that the democratically-elected Argentine government of Carlos Menem started running up the country’s debts to unsustainable levels.
Menem, of course, was a Peronist, just like Cristina Fernández and her late husband — and so it would be hard for her to blame Argentina’s current predicament on him. Somehow, she has managed to persuade the Argentine public — and even AP reporters — that paying off Elliott would be tantamount to ratifying the actions of the military junta which lost power before most Argentines were even born.
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.
The New Republic, Not With a Bang, But a Whimper: The Long, Slow Death Spiral of America’s Labor Movement, here. The article seems reasonable but I still don’t understand this at a decade-over-decade macro-level at all. How does the explanatory power of The Making the English Working Class simply vaporize in the US in couple of decades? The once widely expected epic Thrilla-in-Manila-style ideological struggle between US Labor and Capital is cancelled because of poor ticket sales?
No, the real underlying story is that unions are losing their institutional legitimacy in modern America. The problem isn’t that most people hate unions. The problem for unions is that most people don’t care about them, or think about them, at all.
I had the good fortune to grow up in a wonderful area of Jerusalem, surrounded by a diverse range of people: Rabbi Meizel, the communist Sala Marcel, my widowed Aunt Hannah, and the intellectual Yaacovson. As far as I’m concerned, the opinion of such people is just as authoritative for making social and economic decisions as the opinion of an expert using a model.
Part memoir, part crash-course in economic theory, this deeply engaging book by one of the world’s foremost economists looks at economic ideas through a personal lens. Together with an introduction to some of the central concepts in modern economic thought, Ariel Rubinstein offers some powerful and entertaining reflections on his childhood, family and career. In doing so, he challenges many of the central tenets of game theory, and sheds light on the role economics can play in society at large.
Economic Fables is as thought-provoking for seasoned economists as it is enlightening for newcomers to the field.
Sober Look, Another JPMorgan driven CDX distortion: S9 vs S18 spread widening, here. It ain’t over til it’s over. Will the Wolf Pack kill the London Whale again?
This looks like an opportunity for a trade as over time the spread between the two should narrow again. However since the widening is likely driven by JPMorgan, there may be room for further widening if the CIO’s office is indeed unwinding their massive position. And this widening is sure to cause JPMorgan to incur additional losses.
Sober Look, Latest on sovereign CDS activity; Germany makes top five, here.
Here is the latest sovereign CDS volumes from DTCC. The two charts show the net CDS outstanding (one month average) and the daily trading volume (also one month average).
For journalists, this new income source could hardly come at a more welcome time. Islam told me that if I wanted to syndicate my blog through his platform, I would probably get at least $500 per customer per month, and more if the customer was a big news site. He reckoned he could quite easily find 10 or 20 customers wanting to use my content — which raises the prospect of a $10,000-per-month income stream, just for my blog alone. There aren’t many bloggers, journalists, or publishers who are going to be comfortable turning down that kind of money. Even if Islam was blowing smoke a little as to how much money my blog might be able to get, the fact is that blogs have real value on the syndication market, now, and it’s silly for bloggers not to realize that value.
I’m a fan of syndication — I’ve been doing it for free for many years now. My posts can be found at Seeking Alpha, where I have 59,383 followers; at Wired; at CJR; even at Business Insider. Most of those BI articles are just excerpts and links to my Reuters blog, but occasionally someone at BI will ask if they can run a post in full, and I say yes. As I do to most other people who ask me nicely. And it works the other way too: in September I ran a post from Henry Blodget on this blog.
Bloomberg, JPMorgan CIO Swaps Pricing Said To Differ From Bank, here. This is one of the Bloomberg stories reporting that the CIO used different CDS levels to mark the London Whale positions versus the Credit Desk’s positions. presumably in the same US Corp names. Level of surprise here is zero. Different trading desk almost certainly migrate to their own marks in cases where 1. there is no obvious market close mark used uniformly by everyone that covers the desk’s entire inventory or 2. the risk and valuation analytics used on the desk display idiosyncratic sensitivity behavior wrt the desk’s inventory that can be addressed or ameliorated by massaging the closing marks. Think about hedging corporate loans w CDS, Counterparty Risk Valuation, the Synthetic credit desk, and Flow CDS desk for example. The quant models are all different even though the exposure is to many of the same credit names. Happens in lots of places and its very well known to trading management mostly I suspect because of the internal exposure to traders arbing the desk. Go look for the Junior JPM trader who is arbing the London Whale from the inside, that would be a cool story. This is kinda, meh.
Bloomberg, JPMorgan’s Iksil Said To Take Big Risks Long Before Loss, here. London Whale has a VaR exceeding 60 million USD. So the CIO is ready to signoff on daily MTM fluctuations that would feed a hungry wolf pack hedge fund for a long long time. OK so far, but then Bloomberg reporters run their story into the weeds. Lots of prose about changes in VaR, the model nobody really looks at, ever. Go ask Taleb his opinion about people who think about VaR levels. This is his time to shine.
Then there are interviews with retired heads of risk quant methodology, quotes from CEOs, and off the record chats with regulators. Reporters could actually be quoting interest group discussions on LinkedIn to clarify the more subtle issues:
Andrew Abrahams, who had been head of quantitative research and model oversight at JPMorgan, reporting to the chief risk officer, retired in May, according to his profile on the website LinkedIn. He’s now a founder at Gnana Inc., according to LinkedIn. He’s also an instructor at Stanford University near Palo Alto, California, where in January he taught aseminar on “model risks, safeguards and new directions,” according to the school’s website.
If you had to make a list of people most likely not to know anything about the London Whale positions, these folks would be near the top of the list. This is like getting interview footage on what it is like to defend LeBron James and DWade in Game 7 playoff situations from Dennis Rodman, David Stern, or the referees.
Guys here’s a plan, there is a lonely, overworked, underpaid associate who works in the JPM CIO preparing the London Whale daily P&L Excel reports and celebrates to the point of inebriated collapse at some Isle of Dogs watering hole listening to Julie Brown every Friday starting sometime around 6 to 7pm, how about talking to that guy? I don’t know his name, it’s not important now. OK, let’s call him Basil. A dozen 16-ounce-max Extra Stouts and a bucket of batter dipped wings separate you and the Pulitzer, you can smell it, right?
A. See if you can get the names of the top Counterparties on the Whale’s CDX tranche trades, even just by outstanding notional would be fine.
B. Whenever you want to mention “VaR” to the lightly inebriated Basil, instead substitute “FPGA Gaussian Copula” and see what happens. e.g., “Those revised FPGA Gaussian Copula levels were really whack, Broham!”
Andrew Lo, Freakonomics, The Best Third-Grade Teacher Ever, here.
This is why being appointed Class Scientist was so important to me at the time. Although it was a title and function Mrs. Ficalora created out of thin air, it gave me a much-needed boost of confidence that was based on specific accomplishments, not just empty praise that even a third-grader can see through. It also spurred me to set new goals for myself each week as I tried to outdo my previous presentations to my classmates because, after all, as Class Scientist I had to produce! Despite my learning issues, I blossomed in Mrs. Ficalora’s class, and I believe this experience was the seed that eventually flowered into my current academic career. I was given an opportunity to excel in my own small way, and this was enough to counterbalance my ongoing struggles with mathematics.
Pollack, Alphaville, The great CLO deleveraging, here.
Back in December, the FT’s Tracy Alloway and Robin Wigglesworth explained howthat which was financed by collateralised loan obligations was no longer going to be so financed. This will lead to a credit crunch for sub-investment grade companies that looks set to kick off in earnest in a couple of years.
Salmon, Did falling correlations cause JP Morgan’s trading losses? here.
But if you look at this chart, the period when Bruno Iksikl was putting on his huge CDS index trade was also the period when correlations were falling at an almost unprecedented pace.
Business Insider, RITHOLTZ: I Think About JP Morgan’s Trading Loss The Same Way I Think About Cockroaches, here.
“The question is, ‘Is this $2 bill loss going to be $3 billion, $4 billion, or $5 billion?’ I don’t know. The lesson we learn about cockroaches is that there’s never just one,” he said.
Business Insider, NASSIM TALEB EXPLODES: JP Morgan’s Ina Drew Was Paid More Money Than Mob Boss John Gotti For Taking Risks With Our Money, here. Taleb’s anger followed by the Donna Summer tribute seems like a setup for the Gregory Brothers to autotune.
Zerohedge, Nassim Taleb Is Angry That Not Even John Gotti Got Paid As Much As JPM’s Ina Drew, here.
Team Firm Risk as we discussed before, in Team Firm Risk: 0 Taleb: 2Bn (halftime), this is on you.
Business Insider, And Now JP Morgan’s $2 Billion Trading Loss Is Already $3 Billion (And Counting), here. Ok so the reported losses are growing.
Jamie Dimon said it could get worse… and it is.
The JP Morgan trading loss that was $2 billion four days ago is now $3 billion, report Nelson Schwartz and Jessica Silver-Greenberg in the New York Times.
Because every hedge fund in the world knows JP Morgan is stuck in a position so big that it can’t unwind it… and they’re betting against it.
Zerohedge, Jamie Dimon “Invited” To Testify Before Senate, here. And there will be compelling TV on its way.
Update: JPMORGAN SAYS DIMON TO AGREE TO TESTIFY TO SENATE. Ummmm, there was an option?
As everyone (or at least Zero Hedge) long expected, JPM’s prop trading debacle just got political and senators are about to demonstrate to the world just how little they understand about modern IG9-tranche pair trades. Expect to hear much more about JPM’s “shitty” prop deal.
Zerohedge, So How Are JPM’s Prop “Counterparties” Faring? here. But Bluecrest and Blue Mountain are not reporting like they are Party B. There are reports that Boaz Weinstein/Saba is Party B but no actual P&L numbers being whispered. Odd?
Now one thing we know is that when it comes to reporting one’s results to an aggregator: when you have a profit you never under-represent it. And in this special case, since the funds are likely eager to recruit more like-minded hedge funds to their side of the trade, the best way to do it is by showing profits.
Which, for the early part of May, when the bulk of the JPM losses took place, are oddly missing for the two biggest players across from JPM…
So: where are the profits really going?
Lisa Pollack, Alphaville, Recap and tranche primer, here; and The high yield tranche piece, here. Pollack going to get the book deal for the London Whale, clearly. Once she nails down the positions maybe we will get to the Gaussian Copula substory. Chances seem to be improving that this story is about a bunch of smart guys who tried to resurrect a dead quant model. Maybe it would be better to recast the story as a Zombie Quant model or go with the J Depp/Dark Shadows/Vampire Quant model. But even though this story has massive potential to connect with loads of people, Pollack is not locating Party B P&L nor has anyone else. It’s a problem if you cannot get that puzzle piece. Plus there is way more premeditation here than just Keystone Cops stuff started to happen on 6 Apr. Maybe there is some offshore vehicle hole getting filled up whose reference entity name cannot be spoken? That would change the story’s complexion, right? Maybe the London Whale is a red herring?
Coverage of the
$2bn$3bn loss emanating from JPMorgan’s Chief Investment Office on its synthetic credit portfolio continues a pace, and FT Alphaville’s tour continues too.
The desire to understand what the trade was and the rationale behind it continues to bug us and many others. Interestingly, some of the discussion of late has come full circle. Bloomberg kicked off the London Whale saga on April 6th, and their follow-up on April 9th contained a detail that has now come back into the narrative. This time, though, it’s more than a mere sidenote — more on this in a minute.
While these more recent explanations are satisfying, we’re still scratching our heads a bit.
The challenge remains: to find trades that have managed to deteriorate with the speed that CEO Jamie Dimon has claimed they have — small in the first quarter, $2bn “all in the second quarter”, and “it kind of grew as the quarter went on”.
Now, credit tranches, which are leveraged positions on credit indices that themselves already involve a lot of leverage, could do this if the model used to determine hedge ratios wasn’t up to the task or if the trades were just outright foolish.
Business Insider, REPORT: Traders Are Saying This Legendary Deutsche Bank Veteran Harpooned JP Morgan’s ‘London Whale’, here.
But who was on the other side of that trade?
Naked Capitalism, Satyajit Das, Topiary Lessons – JP Morgan’s US $2 Billion Loss, here.
Having benefitted from risk management failures of others such as investment bank Bear Stearns and hedge fund Amaranth, JP Morgan (“JPM”) appears to have made an “egregious” and “self inflicted” hedging error. The bank would have done well to reflect on John Donne’s meditation: “send not to know for whom the bell tolls it tolls for thee”.
NYT, At JPMorgan Chase, a Complex Strategy That Backfired, (via DealBreaker) here. Nice diagram illustrating how opening a umbrella over your umbrella can become a bomb.
WSJ, Hedge Funds Profit as J.P. Morgan Sees Losses, here.
Firms such as BlueMountain Capital Management LLC and BlueCrest Capital Management LP each scored gains of about $30 million, according to people familiar with the matter.
Here is the “transcript” that everyone is talking about, but it would seem only listened to with selective hearing and have read without reading. This is my analysis of what was said and what it could mean.
So he comes clean about the loss. It is $800 million after taxes. Just over $2 billion on the trade, offset by about $1 billion in gains from an Available for Sale (AFS) account run by the CIO’s office.
Al Pacino, Any Given Sunday, here; or Clint Eastwood, here. Now we are going to have to endure a seemingly endless stream of Taleb’s gloating i-have-been-warning-you-about-VaR-for-years interviews; the FinQuant equivalent of the Icky Shuffle. Look Team Firm Risk, you all have seen It’s a Wonderful Life, right? Well every time a bank gets their bell rung, Taleb gets another Fox and Friends interview.
Naked Capitalism, JP Morgan Loss Bomb Confirms That It’s Time to Kill VaR, here.
One of the amusing bits of the hastily arranged JP Morgan conference call on its $2 billion and growing “hedge” losses and related first quarter earning release was the way the heretofore loud and proud bank was revealed to have feet of clay on the risk management front. Jamie Dimon said that the bank had determined that its value at risk model was “inadequate” and it would be using an older model. And no wonder. The Financial Times report contained this bombshell:
JPMorgan also restated its “value at risk”, a measure of maximum possible daily losses, of the CIO [the unit that executed the trading strategy that blew up] in the first quarter from $67m to $129m.
“Synthetic credit portfolio”. That’s the book where the $2bn in mark-to-market losses took place for JP Morgan, according to an announcement made on Thursday. A result which has now cost them a their AA- rating from Fitch and landed them on negative outlook with S&P, as announced late on Friday.
FT Alphaville has analysed the credit trades that might be in that portfolio, in an attempt to reason through what may have gone on. The fact, however, remains that we know precious little. Why is that? Is this acceptable that after the financial crisis that this can happen to a bank, let alone a systemically important one like JP Morgan?
Got a buck that says you cannot find a Firm Risk person on 13 May 2012 who knows substantially more about the positions than Lisa Pollack.
Zerohedge, Double or Nothing: How Wall Street is Destroying Itself, here.
This fragile business model is in fact descended from the Martingale roulette betting system. Martingale is the perfect example of the failure of theory, because in theory, Martingale is a system of guaranteed profit, which I think is probably what makes these kinds of practices so attractive to the arbitrageurs of Wall Street (and of course Wall Street often selects for this by recruiting and promoting the most wild-eyed and risk-hungry). Martingale works by betting, and then doubling your bet until you win. This — in theory, and given enough capital — delivers a profit of your initial stake every time. Historically, the problem has been that bettors run out of capital eventually, simply because they don’t have an infinite stock (of course, thanks to Ben Bernanke, that is no longer a problem). The key feature of this system— and the attribute which many institutions have copied — is that it delivers frequent small-to-moderate profits, and occasional huge losses (when the bettor runs out of money).