One of the main beneficiaries of governments' push for kamikaze interest rates and more credit in order to add to the mountain of toxic debt already built, are the rating agencies.
Far from being bypassed in the current new debt issuance bonanza, the rating agencies, who manufactured the structured finance ratings that propelled the credit crisis, are mainstream in the ratings of the various government-backed issues of new bank debt.
Instead of punishing the rating agencies for their past greed-induced blindness and insisting on fundamental changes to their business models, the desperation to create more money has led to the political expediency of doing nothing to change the agencies' flawed methods, for fear of delaying the issuance of the supposedly much-needed debt.
As for quantitative easing, will governments be buying unrated debt or will they too be demanding the illusory comfort of a rating agency prognostication?
Warren Buffet's fund which continues to hold over 20% of Moody's (MCO) seems to have correctly backed the embedded rating agencies over the interest-ridden, prevaricating politicians in the various public spectacles and recriminatory showdowns.
However, all it needs is for the SEC which, through its own laziness, started the process of hard-wiring the rating agencies into bondmarket regulation in 1975, to cut some of the wires. One example that springs to mind is that bonds issued by banks which carry full-faith government guarantees could be automatically designated by the SEC as risk-free and therefore not requiring of a rating. OK, so the rating agencies would then potentially seek to invoice the US government more for its sovereign rating but normally the agencies only charge against the traded liability - not against the contingent liability.
But this is not going to happen.
Rating agencies will not have to change; regulators cannot think of an alternative and who knows, the next quantitative black box models might get it right, so why bother looking for an alternative.
Meanwhile, investment managers are either mandated to follow ratings or potentiallly expose themself to legal challenge from their investors if they lose money on unrated transacations - how can that Catch 22 change?
So it's business as usual for the agencies with the added bonus of Basel 2 work to support their revenues and cement their position in the regulatory framework.
Wednesday, 4 February 2009
Tuesday, 20 January 2009
Quantitative easing - no -sell CDS
One thing governments are bad at is intervention in markets. The only success I can think of is the time when the HKMA bought a slug of Hang Seng index shares during the Asian crisis to put an end to the interest rate - property stocks shenanigans that were going on. What's more, after the crisis, the acquired shares were sold at a profit.
At the moment in the UK we have too much credit and not enough lending. At the same time interest rates have been cut and money market meddling undertaken in order to restart the lending process. The interest rate changes have had little impact - pushing on a string - as some commentators say. The reason for this failure of policy is that, thanks to the CDS market, the price of credit and the overall cost of borrowing have become detached.
So Mervyn King should step in and sell credit protection (CDS) in all the UK financial names.
This has many benefits and few drawbacks.
a) Selling reduces the price and so the cost of credit as measured by the CDS spread would decline. The lower CDS value would lower the cost of cash borrowings for these institutions.
b) It is so cheap - in fact selling means that HMG receives regular premiums from the buyer of the CDS protection. These are only a small percentage of the underlying notional debt but could be used to buy back cash debt in the underlying institutions or to buy their shares or for the money to be applied to whatever financial support measure the government has in mind. This would help close the gap between the cash and credit markets.
c) Unlike quantitative easing a) the impact of the CDS sales activities can be readily seen from market prices and adjusted more rapidly than interventions in the money market and b) there is no long-term such as hyper-inflation; once the CDS term is reached, the liability expires and the notional credit disappears.
d) By upsetting the players in the CDS market, the government might be able to bring to an end the derivatives monster. This is where all the credit is lurking and hence we have the paradox of seemingly too much credit in the system but not enough in the real world. Initially, the CDS sales are creating more credit but once the market has decided that it can't win against a sovereign that is backing the underlying credit, the CDS market would shrink. At this stage, the regulators can then step in to control banks' further exposures to derivatives by, for example, changes to the capital adequacy ratings for such instruments.
e) As CDS market players have found, you get a lot off bang for your buck. So don't waste money in cash bondmarkets, invest in derivatives where you can have some impact.
f) As CDS is essentially a form of insurance, HMG could reassess the level of guarantees it has set for the UK bank indebtedness. Maintaining a blend of CDS and guarantees would help bring equilibrium between the cost of credit, the credit risk of banks and the credit risk of the sovereign.
While the government has many consultants, I note that Mr Brown's key adviser is probably Baroness Vadera. Methinks her knowledge of day to day trading in CDS and cash bondmarkets might be limited, given that she left Warburg's in April 1999 - when CDS was the plural of compact disc and the Euro was only 3 months old!
But there again, is Dr Bernanke up to date? How much notional credit was wafting round the credit default swap markets in the 1930's? Is his study of the Great Depression that relevant or do we need the blend of barrow boys and quant jocks that got us into the mess to tap away on their laptops (another consumer staple of the 1930s) and find a way out?
At the moment in the UK we have too much credit and not enough lending. At the same time interest rates have been cut and money market meddling undertaken in order to restart the lending process. The interest rate changes have had little impact - pushing on a string - as some commentators say. The reason for this failure of policy is that, thanks to the CDS market, the price of credit and the overall cost of borrowing have become detached.
So Mervyn King should step in and sell credit protection (CDS) in all the UK financial names.
This has many benefits and few drawbacks.
a) Selling reduces the price and so the cost of credit as measured by the CDS spread would decline. The lower CDS value would lower the cost of cash borrowings for these institutions.
b) It is so cheap - in fact selling means that HMG receives regular premiums from the buyer of the CDS protection. These are only a small percentage of the underlying notional debt but could be used to buy back cash debt in the underlying institutions or to buy their shares or for the money to be applied to whatever financial support measure the government has in mind. This would help close the gap between the cash and credit markets.
c) Unlike quantitative easing a) the impact of the CDS sales activities can be readily seen from market prices and adjusted more rapidly than interventions in the money market and b) there is no long-term such as hyper-inflation; once the CDS term is reached, the liability expires and the notional credit disappears.
d) By upsetting the players in the CDS market, the government might be able to bring to an end the derivatives monster. This is where all the credit is lurking and hence we have the paradox of seemingly too much credit in the system but not enough in the real world. Initially, the CDS sales are creating more credit but once the market has decided that it can't win against a sovereign that is backing the underlying credit, the CDS market would shrink. At this stage, the regulators can then step in to control banks' further exposures to derivatives by, for example, changes to the capital adequacy ratings for such instruments.
e) As CDS market players have found, you get a lot off bang for your buck. So don't waste money in cash bondmarkets, invest in derivatives where you can have some impact.
f) As CDS is essentially a form of insurance, HMG could reassess the level of guarantees it has set for the UK bank indebtedness. Maintaining a blend of CDS and guarantees would help bring equilibrium between the cost of credit, the credit risk of banks and the credit risk of the sovereign.
While the government has many consultants, I note that Mr Brown's key adviser is probably Baroness Vadera. Methinks her knowledge of day to day trading in CDS and cash bondmarkets might be limited, given that she left Warburg's in April 1999 - when CDS was the plural of compact disc and the Euro was only 3 months old!
But there again, is Dr Bernanke up to date? How much notional credit was wafting round the credit default swap markets in the 1930's? Is his study of the Great Depression that relevant or do we need the blend of barrow boys and quant jocks that got us into the mess to tap away on their laptops (another consumer staple of the 1930s) and find a way out?
Thursday, 6 November 2008
Moore's Law and the Credit Crunch
Steve Lohr's comment in The New York Times on Tuesday November 4, titled "In Modeling Risk, the Human Factor was left out" makes for an interesting read. The blame for the financial meltdown is placed on those who thought they had covered all the angles in modelling financial markets, but who had forgotten the human factor.
However, he does not mention the providers of the technology. If guns had not been invented then people wouldn't get shot and without the development of computer technology and software, the financial engineering could not have taken place.
In 1987, the quant guys couldn’t handle massive, multi-variate models on their slow PCs, yet alone e-mail relatively small Supercalc spreadsheets to all and sundry.
Now SQL, SSPS and Excel, combined with Intel chips and the internet, give people tremendous computing power to produce models and an array of accompanying graphs to prove in glorious technicolor that all outcomes have been tested and therefore the computer’s output is right.
In addition, multiple recipients can now readily see these 50Mbyte models anywhere in the world on a 24/7 basis and be similarly enticed, thanks to e-mail, wi-fi and search engines.
As ever though, garbage in, garbage out or as Mr Lohr more accurately points out, not all the data to validate all the outcomes were input to these models despite the size of them. Forecasting, the daily returns of a large portfolio of multi-year mortgages would test even today’s laptops.
Perhaps the computer simply discourages critical, common-sense based thinking. People tend to believe everything they see on the internet. By contrast, a generation ago, people were told not to believe everything they read in newspapers.
But we've been here before. This financial crisis caused by misbehaving markets (as the models would have us believe) is a re-run of past crises of illiquid securities. The success of great minds and their models baffling mere mortals, was highlighted by the failure of LTCM which collapsed in 1998, just one year after two of its partners, Messrs Merton and Scholes got their Nobel economics prize for option theory.
Unfortunately, the financial regulators chose not to learn from this close call on the integrity of the financial system; financial engineering and its inherent weaknesses could continue unabated.
Now 10 years on from LTCM, and according to Moore's Law (chip capacity can double every 2 years) we now have around 2^5 the computing power that was available to the LTCM team. This should have given us the chance to make a 2^5 greater mess than the $4.6bn loss covered by the FED-orchestrated bailout in 1998.
So will we get away with just a 32x increase in bailout cost? It doesn't look like it at present, as markets talk in terms of trillions of dollars of CDS exposures and bank writedowns already total $702bn (Bloomberg).
But who knows, the net net cost might just be $117bn. In which case, if we escape with this low amount, then after the crisis, financial engineering can start again happy in the knowledge that in 2018, the cost of a bailout will be no more than 2^10 more than in 1998, at $4.7trillion.
However, he does not mention the providers of the technology. If guns had not been invented then people wouldn't get shot and without the development of computer technology and software, the financial engineering could not have taken place.
In 1987, the quant guys couldn’t handle massive, multi-variate models on their slow PCs, yet alone e-mail relatively small Supercalc spreadsheets to all and sundry.
Now SQL, SSPS and Excel, combined with Intel chips and the internet, give people tremendous computing power to produce models and an array of accompanying graphs to prove in glorious technicolor that all outcomes have been tested and therefore the computer’s output is right.
In addition, multiple recipients can now readily see these 50Mbyte models anywhere in the world on a 24/7 basis and be similarly enticed, thanks to e-mail, wi-fi and search engines.
As ever though, garbage in, garbage out or as Mr Lohr more accurately points out, not all the data to validate all the outcomes were input to these models despite the size of them. Forecasting, the daily returns of a large portfolio of multi-year mortgages would test even today’s laptops.
Perhaps the computer simply discourages critical, common-sense based thinking. People tend to believe everything they see on the internet. By contrast, a generation ago, people were told not to believe everything they read in newspapers.
But we've been here before. This financial crisis caused by misbehaving markets (as the models would have us believe) is a re-run of past crises of illiquid securities. The success of great minds and their models baffling mere mortals, was highlighted by the failure of LTCM which collapsed in 1998, just one year after two of its partners, Messrs Merton and Scholes got their Nobel economics prize for option theory.
Unfortunately, the financial regulators chose not to learn from this close call on the integrity of the financial system; financial engineering and its inherent weaknesses could continue unabated.
Now 10 years on from LTCM, and according to Moore's Law (chip capacity can double every 2 years) we now have around 2^5 the computing power that was available to the LTCM team. This should have given us the chance to make a 2^5 greater mess than the $4.6bn loss covered by the FED-orchestrated bailout in 1998.
So will we get away with just a 32x increase in bailout cost? It doesn't look like it at present, as markets talk in terms of trillions of dollars of CDS exposures and bank writedowns already total $702bn (Bloomberg).
But who knows, the net net cost might just be $117bn. In which case, if we escape with this low amount, then after the crisis, financial engineering can start again happy in the knowledge that in 2018, the cost of a bailout will be no more than 2^10 more than in 1998, at $4.7trillion.
Monday, 13 October 2008
ICICI Bank disingenuousness
ICICI is parading the fact that Moody's is rating its UK subsidiary at Baa1.
Two things strike me; a) it's Moody's, the same outfit that had Kaupthing at Baa3 until as recently as October 8th and b) the rating is higher than Moody's FC rating for the Indian parent.
So it looks like the Baa1 rating includes some support from a higher rated entity - presumably the UK government. But did anyone see ICICI UK Ltd on HMG's "chosen few" list of 7 banks and 1 building society?
And the other rating agencies - both have ICICI India at BBB-/stable, with an A3 short-term rating. Furthermore, bank strength ratings are in the order of C and C-; these are weak for a bank.
So thanks to Moody's JDA (joint default assessment) scheme, which gives the UK branch a better rating (neither Fitch or S&P rate the UK entity and why would ICICI buy an extra rating if it's lower?), the management are trying to imply that all is well. For some reason, ICICI Ltd in Singapore does not get any uplift and is Baa2 according to Moody's but that is probably down to the Moody's JDA black box expectation of support from MAS.
The move to seek reaffirmations of the ICICI ratings from Moody's and S&P over the weekend is an unusual move and almost certainly requested by the company. The hurriedness is reflected in the S&P statement referring to "Bakerie" rather than the Bakrie group.
In conclusion, things may be well with ICICI India but there is no guarantee for the UK subsidiary. Things may well be well for the UK subsidiary too, although it does seem to have been more exposed to the shenanigans of international derivatives than the Parent in India.
What is not so good is management's apparent misunderstanding of ratings and structural sub-ordination and the implications this has for the advice management is giving to the world at large about its relative credit standing.
Two things strike me; a) it's Moody's, the same outfit that had Kaupthing at Baa3 until as recently as October 8th and b) the rating is higher than Moody's FC rating for the Indian parent.
So it looks like the Baa1 rating includes some support from a higher rated entity - presumably the UK government. But did anyone see ICICI UK Ltd on HMG's "chosen few" list of 7 banks and 1 building society?
And the other rating agencies - both have ICICI India at BBB-/stable, with an A3 short-term rating. Furthermore, bank strength ratings are in the order of C and C-; these are weak for a bank.
So thanks to Moody's JDA (joint default assessment) scheme, which gives the UK branch a better rating (neither Fitch or S&P rate the UK entity and why would ICICI buy an extra rating if it's lower?), the management are trying to imply that all is well. For some reason, ICICI Ltd in Singapore does not get any uplift and is Baa2 according to Moody's but that is probably down to the Moody's JDA black box expectation of support from MAS.
The move to seek reaffirmations of the ICICI ratings from Moody's and S&P over the weekend is an unusual move and almost certainly requested by the company. The hurriedness is reflected in the S&P statement referring to "Bakerie" rather than the Bakrie group.
In conclusion, things may be well with ICICI India but there is no guarantee for the UK subsidiary. Things may well be well for the UK subsidiary too, although it does seem to have been more exposed to the shenanigans of international derivatives than the Parent in India.
What is not so good is management's apparent misunderstanding of ratings and structural sub-ordination and the implications this has for the advice management is giving to the world at large about its relative credit standing.
Wednesday, 8 October 2008
Gordon Brown should copy HKMA
Given that the equity market is the most liquid, the most talked about and a key element in economic Lead Indicators, why doesn't HMG buy bank shares?
It can then make proper representation as a shareholder in the control of the business and can profit from its involvement.
Given that it is giving liquidity through the Bank of England, some equity upside is not too much to ask.
Unlike Mr Buffet, HMG should buy from the market and not take options on future performance. Furthermore, the preference share route is best avoided; these do not provide a cushion to a bank's equity price, but act as a penal charge on income. In the current environment of liability guarantees, the cushion to unsecured creditors afforded by the preference shares is simply not needed.
The common equity purchase plus judicious involvement in any rights issues or placings represent the best spur for confidence and allow the market to see the floor. All those investors now holding cash can then take a view.
In purchasing the equity, the trading criteria should be specific; e.g. it will be a potential buyer of bank shares if the price to book is say less than 0.35x and a potential seller if the price to book is over 0.65x. It will never sell more than 5% of its holding or 1% of the shares outstanding in the bank in any one day, and so on.
Does it work? Ask the Hong Kong Monetary Authority if their $15bn of share purchases on the Hong Kong stockmarket, over two weeks in August 1998, worked. I think it did, and they subsquently made a good profit. Perhaps there's some gecko lurking somewhere in Gordon waiting to emerge.
It can then make proper representation as a shareholder in the control of the business and can profit from its involvement.
Given that it is giving liquidity through the Bank of England, some equity upside is not too much to ask.
Unlike Mr Buffet, HMG should buy from the market and not take options on future performance. Furthermore, the preference share route is best avoided; these do not provide a cushion to a bank's equity price, but act as a penal charge on income. In the current environment of liability guarantees, the cushion to unsecured creditors afforded by the preference shares is simply not needed.
The common equity purchase plus judicious involvement in any rights issues or placings represent the best spur for confidence and allow the market to see the floor. All those investors now holding cash can then take a view.
In purchasing the equity, the trading criteria should be specific; e.g. it will be a potential buyer of bank shares if the price to book is say less than 0.35x and a potential seller if the price to book is over 0.65x. It will never sell more than 5% of its holding or 1% of the shares outstanding in the bank in any one day, and so on.
Does it work? Ask the Hong Kong Monetary Authority if their $15bn of share purchases on the Hong Kong stockmarket, over two weeks in August 1998, worked. I think it did, and they subsquently made a good profit. Perhaps there's some gecko lurking somewhere in Gordon waiting to emerge.
Wednesday, 1 October 2008
Debt for Equity - not liabilities to governments
There is a concern that banks have stopped lending. Is this because there are no solid borrowers or is it because lenders have lost faith as a result of arbitary changes to property rights and bankruptcy laws?
Banks will not advance money if they no longer see the equity of the borrower taking the first hit. If there is no first hit to be taken, then the banks must assume that they are pari passu with equity holders.
The main problem facing markets is that banks are facing immediate heavy losses arising from derivative financial contracts. Banks balance sheets are not designed for catastrophic losses of equity, but they can absorb up to 10% to 15% total losses on their loan book over say 5 years. This is equivalent to a 50% to 66% recovery on a bad loan book equivalent to 30% of the total loan book. Banks with non-performing assets = 10% of total assets will struggle. If the ratio reaches 20%, the bank will most likely fail.
For example, assume a typical bank with common equity of 6% of assets and a pre-tax, pre-provision ROA of 3.5%. If in any one year 15% of the loan book is non-performing then ppROA will fall to say 3%. Provisions and losses at 33% of these NPA reduce overall ROA to 0% and eat into equity to the value of 2% of assets, reducing equity to 4% of assets. The bank has an equity issue of say 1 new share for every one held but as the Price to Book Value will be <<1.0x, say 0.5x, the equity base only recovers to where it was before, at 6% assets.
If the same happens the following year, then shareholders will once again need to chuck money at the bank equivalent to 2% of the asset base until the problem eases.
But if I don't recover 67cents on the dollar and/or if the NPA ratio is higher, then the equity will be depleted by much more than 2% of the asset base. In addition, the ppROA will be adversely impacted by funding costs and the price to book ratio, ahead of the new share issue, will be even more bleak.
The forthcoming settlement of AIG, Fannie & Freddie, and Lehman CDS contracts means that we will get some market clearing prices on the bad assets. Then buyers and suppliers of capital will magically reappear because the calculations outlined above can be done with more certainty.
However, bank recapitalisation also requires time. As alluded to above, banks take the hits year by year and that is because the work out of loans or recovery of collateral are also time consuming processes. Furthermore, as these bad loans were "held to maturity" assets, and thus valued with some discretion, the banks had a chance to blend internally generated capital and external equity injections to restore the bank to rude health.
By contrast, the upcoming CDS auctions could be traumatic as we are trying to estimate in a few days the recovery value of the assets and the liabilities of four intertwined businesses. This is before the people now controlling the failed entities have barely started work on assessing the real assets of the businesses.
Unfortunately there is massively more value in the CDS being settled by auction than there is in the real assets of the business. Maybe 10x more derivatives traded than underlying assets, maybe much more. Mispricing the CDS values by 5cents on the dollar is equivalent to being 50% wrong on the value of the real assets.
But unfortunately the market price established will need to be used by the banks and this will almost certainly throw up some permanent impairments to their "held to maturity" loans. The chance for banks to smooth their way back to profits will have disappeared.
There seem to be three routes forward assuming banks remain in the private sector;
i) BIS and/or Fed relax the banks' capital criteria,
ii) another major overhaul of mark to market accounting is required or
iii) creditors take equity.
The purest route forward to offset the instant value destruction derived from the CDS auction would seem to be the creation of instant equity. In other words, there must be a mechanism for the instant swap of debt for equity.
But such changes cannot happen if governments have guaranteed all non-consumer deposits and liabilities, or if indeed the government has already split the balance sheet up.
As noted earlier, banks, in effect, already believe that they are no better off than equity holders which is why they are not lending. However, it is not the uncertainty of the credit market that makes holding equity unattractive but the unpredictability of government actions with respect to any holder of a bank liability.
At least with another bank's equity in their pockets, a bank then owns (albeit a very large amount) a homogeneous, transparently-priced security for which there is a liquid market - as long as the government doesn't interfere.
And finally, the conflict between going concern principles and fair value accounting can, in my view, best be resolved if liabilities are valued at the higher of par or market value. (Pension liabilities should be discounted at long-term government bond yields). There would need to be a balancing quasi-financial asset, but at least the ridiculous state of affairs where a struggling bank can show an enhanced equity valuation because the market discount to par of its own capital instruments are credited to equity, would disappear.
Invexit
Banks will not advance money if they no longer see the equity of the borrower taking the first hit. If there is no first hit to be taken, then the banks must assume that they are pari passu with equity holders.
The main problem facing markets is that banks are facing immediate heavy losses arising from derivative financial contracts. Banks balance sheets are not designed for catastrophic losses of equity, but they can absorb up to 10% to 15% total losses on their loan book over say 5 years. This is equivalent to a 50% to 66% recovery on a bad loan book equivalent to 30% of the total loan book. Banks with non-performing assets = 10% of total assets will struggle. If the ratio reaches 20%, the bank will most likely fail.
For example, assume a typical bank with common equity of 6% of assets and a pre-tax, pre-provision ROA of 3.5%. If in any one year 15% of the loan book is non-performing then ppROA will fall to say 3%. Provisions and losses at 33% of these NPA reduce overall ROA to 0% and eat into equity to the value of 2% of assets, reducing equity to 4% of assets. The bank has an equity issue of say 1 new share for every one held but as the Price to Book Value will be <<1.0x, say 0.5x, the equity base only recovers to where it was before, at 6% assets.
If the same happens the following year, then shareholders will once again need to chuck money at the bank equivalent to 2% of the asset base until the problem eases.
But if I don't recover 67cents on the dollar and/or if the NPA ratio is higher, then the equity will be depleted by much more than 2% of the asset base. In addition, the ppROA will be adversely impacted by funding costs and the price to book ratio, ahead of the new share issue, will be even more bleak.
The forthcoming settlement of AIG, Fannie & Freddie, and Lehman CDS contracts means that we will get some market clearing prices on the bad assets. Then buyers and suppliers of capital will magically reappear because the calculations outlined above can be done with more certainty.
However, bank recapitalisation also requires time. As alluded to above, banks take the hits year by year and that is because the work out of loans or recovery of collateral are also time consuming processes. Furthermore, as these bad loans were "held to maturity" assets, and thus valued with some discretion, the banks had a chance to blend internally generated capital and external equity injections to restore the bank to rude health.
By contrast, the upcoming CDS auctions could be traumatic as we are trying to estimate in a few days the recovery value of the assets and the liabilities of four intertwined businesses. This is before the people now controlling the failed entities have barely started work on assessing the real assets of the businesses.
Unfortunately there is massively more value in the CDS being settled by auction than there is in the real assets of the business. Maybe 10x more derivatives traded than underlying assets, maybe much more. Mispricing the CDS values by 5cents on the dollar is equivalent to being 50% wrong on the value of the real assets.
But unfortunately the market price established will need to be used by the banks and this will almost certainly throw up some permanent impairments to their "held to maturity" loans. The chance for banks to smooth their way back to profits will have disappeared.
There seem to be three routes forward assuming banks remain in the private sector;
i) BIS and/or Fed relax the banks' capital criteria,
ii) another major overhaul of mark to market accounting is required or
iii) creditors take equity.
The purest route forward to offset the instant value destruction derived from the CDS auction would seem to be the creation of instant equity. In other words, there must be a mechanism for the instant swap of debt for equity.
But such changes cannot happen if governments have guaranteed all non-consumer deposits and liabilities, or if indeed the government has already split the balance sheet up.
As noted earlier, banks, in effect, already believe that they are no better off than equity holders which is why they are not lending. However, it is not the uncertainty of the credit market that makes holding equity unattractive but the unpredictability of government actions with respect to any holder of a bank liability.
At least with another bank's equity in their pockets, a bank then owns (albeit a very large amount) a homogeneous, transparently-priced security for which there is a liquid market - as long as the government doesn't interfere.
And finally, the conflict between going concern principles and fair value accounting can, in my view, best be resolved if liabilities are valued at the higher of par or market value. (Pension liabilities should be discounted at long-term government bond yields). There would need to be a balancing quasi-financial asset, but at least the ridiculous state of affairs where a struggling bank can show an enhanced equity valuation because the market discount to par of its own capital instruments are credited to equity, would disappear.
Invexit
Friday, 19 September 2008
Investment bank advice to Fed - SOS
Funny how, as the investment banks fell one by one, and as pressure mounted on Goldmans, the governments of the world suddenly took action. Just in time, as one of the most successful pedlars of derivatives and toxic debt products, and a master of trading and short-selling, might have gone bust.
Why governments seek advice from investment banks, the scourge of the modern world, is difficult to understand. For these banks there are yet more fees, coupled with ability to steer their clients towards maintaining loose regulation for their activities. But should not advice on the real economy, come from the commercial banks who handle real deposits and who make loans to material entities?
So instead of allowing their alma matere to be wiped out, to the future benefit of all, these government advisers decide it's time to get their political poodles to do something - save our souls.
(Invexit)
Why governments seek advice from investment banks, the scourge of the modern world, is difficult to understand. For these banks there are yet more fees, coupled with ability to steer their clients towards maintaining loose regulation for their activities. But should not advice on the real economy, come from the commercial banks who handle real deposits and who make loans to material entities?
So instead of allowing their alma matere to be wiped out, to the future benefit of all, these government advisers decide it's time to get their political poodles to do something - save our souls.
(Invexit)
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