Legal Commentary

Amherst's Laurie Goodman on Cleanup Calls

Posted on June 27, 2009
Amherst Holdings, if you'll remember, is the Texas brokerage that duped the big Wall Street banks by (somehow) arranging for the servicer on several subprime MBS to exercise its "cleanup call" provisions, much to the banks' surprise. Exercising the cleanup calls essentially made the CDS contracts on the subprime MBS that the banks had bought from Amherst worthless...

Bespoke Derivatives

Posted on June 27, 2009
Apparently commentators are upset because the administration's financial reform proposal only requires "standardized" derivatives to be cleared through central counterparties (CCPs), and not bespoke derivatives. James Kwak even questions "why we need customized derivatives in the first place...

CDS, Restructuring, and Bankruptcy: A History

Posted on June 24, 2009
Floyd Norris praises the SEC for hiring University of Texas law professor Henry Hu. Norris likes this hire because Hu "was the first one [he] saw to point out that credit [default] swaps could be used to leave a creditor hoping that a company would go into bankruptcy...

AIG Internal Memo on Collateral Calls

Posted on June 24, 2009
CBS News somehow obtained a fascinating AIG internal memo from November 2007 detailing the status of the collateral calls on AIG's CDS portfolio. The memo was evidently written by AIG Financial Products VP Andrew Forster, and it provides tremendous data on AIG's CDS portfolio?it's easily the most and best data in the public domain...

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Two-Year Auction

Posted on June 23, 2009
This morning Bloomberg was reporting that today's $40bn auction of 2YR Treasury notes was expected to go well, and they weren't lying. The auction drew a yield of 1.15 percent (5 bps lower than the consensus estimate), and 2YR yields closed at 1.10 percent...

I'm Back

Posted on June 23, 2009
Sorry for the lack of posting over the past couple of weeks. I've been insanely, mind-bogglingly busy recently. But things are starting to let up, so I plan to resume posting forthwith.

No SEC-CFTC Merger ? Shad-Johnson 2?

Posted on June 11, 2009
It appears settled that the Obama administration's overhaul of financial regulations will not include a CFTC-SEC merger. This is disappointing, especially because the administration is apparently foregoing this no-brainer reform just to avoid the inevitable turf wars in Congress...

The Amherst Trade

Posted on June 11, 2009
The WSJ article about Texas brokerage Amherst Holdings duping the big Wall Street banks is a hot topic today. Based solely on the WSJ article, it appears that Amherst sold CDS on $335 million of subprime MBS to various Wall Street banks over the past year, including J...

On Judge Sotomayor

Posted on June 10, 2009
I don't plan to discuss Judge Sotomayor's nomination on a regular basis?debates over Supreme Court nominees are purely political, and have absolutely nothing to do with jurisprudence. I don't think it's possible to accurately predict what kind of Supreme Court justice a federal judge will be based on her record as a circuit and district judge...

Memories

Posted on June 06, 2009
Remember when the stress tests had been "downgraded to irrelevance," and the PPIP was the only aspect of the Geithner plan that really mattered?Whoops.Turns out the stress tests were rather important, spurring the major banks to raise $65 billion in new capital in less than a month, with more capital raises on the way...

Against a "Systemic Risk Council"

Posted on June 06, 2009
Sheila Bair has publicly opposed the creation of a single systemic risk regulator, and has instead been pushing for a "systemic risk council" that would include the Treasury, the Fed, the SEC, and (surprise!) the FDIC.This is a bad idea. The primary benefit of a single systemic risk regulator is its ability to see how the different areas of the financial markets interact with each other...

First Impression of Gensler's OTC Derivatives Proposal

Posted on June 05, 2009
New CFTC chair Gary Gensler provided a much more detailed description of the administration's OTC derivatives reform proposal on Thursday. While we still don't have nearly enough information to render judgment on the proposal, let me just say that I'm extremely impressed so far...

Yes, the SEC Regulates Derivatives

Posted on June 04, 2009
Felix Salmon apparently thinks the SEC is "charged with regulating securities but not derivatives." Ezra Klein is quick to offer a me-too post, mocking the SEC for saying "derivatives" when it should have said "securities." Klein says that "[i]t's all the worse because the SEC doesn't have the authority to regulate derivatives, even though that appears to be what some of its employees think the agency is doing...

Martin Wolf Takedown of Niall Ferguson

Posted on June 03, 2009
I started writing a post the other day about how Niall Ferguson was just embarrassing himself by claiming victory in his dispute with Paul Krugman, but I never got around to finishing it. Luckily, Martin Wolf was not so easily distracted, and has delivered an epic takedown of Ferguson...

The Effectiveness of Tim Geithner

Posted on June 03, 2009
Back in September 2005, Tim Geithner summoned the so-called Fourteen Families (i.e., the fourteen major dealer banks) to the New York Fed to discuss the horrendous state of the infrastructure in the credit derivatives market. In particular, Geithner was concerned about the enormous backlog of unexecuted confirmations?essentially, backlogs of CDS trades that banks hadn't gotten around to formally completing yet...

Elizabeth Warren and Securitization

Posted on June 03, 2009
Speaking of takedowns, don't miss ABS and MBS veteran Linda Lowell's long takedown of COP chair Elizabeth Warren over at HousingWire.Short version: Warren doesn't know the first thing about securitization markets, and it shows.

The Most (and Least) Timely and/or Prescient Books on the Financial Crisis

Posted on June 01, 2009
I read an inhuman number of books (partly due to the amount of time I spend on planes and in airports), and one of the things I like to do is to informally keep track of the most (and least) timely and/or prescient books I come across. For the dot-com bubble, for example, one of the most timely/prescient books was Bob Shiller's Irrational Exuberance (published in March 2000), and the least timely/prescient book was, obviously, Kevin Hassett and James Glassman's Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market (published in October 1999)...

The Fed's Emergency Powers Are Not New

Posted on May 31, 2009
Washington Post reporters by Binyamin Appelbaum and Neil Irwin have a very strange article about the Fed's emergency powers. Well, I guess it's not so much strange as it is completely wrong. They write:On the day before Thanksgiving in 1991, the U.S. Senate voted to vastly expand the emergency powers of the Federal Reserve...

Brooksley Born

Posted on May 26, 2009
Tomorrow's Washington Post contains a big profile of former CFTC chair Brooksley Born. The Post dubs her "the Cassandra of the credit crisis" because of her infamous showdown with Alan Greenspan and Bob Rubin over the OTC derivatives markets in 1998.So was she, in fact, the Cassandra of the credit crisis?Yes and no...

Did Treasury Adopt Part of Wall Street's OTC Derivatives Plan?

Posted on May 24, 2009
One of the headlines on Bloomberg's front page is, "Geithner Adopts Part of Goldman, JPMorgan Plan for Trading in Derivatives" (when you click through to the article, the headline is "Geithner Adopts Part of Wall Street Derivatives Plan"). Bloomberg reporter Matthew Leising got his hands on a plan for regulating OTC derivatives that Goldman, JPMorgan, Credit Suisse, and Barclays sent to Treasury a few months ago...

Regulatory Turf Wars

Posted on May 20, 2009
The SEC may be going down (good riddance), but apparently not without a fight:The Obama administration may call for stripping the Securities and Exchange Commission of some of its powers under a regulatory reorganization that could be unveiled as soon as next week, people familiar with the matter said...

New Housing Price Trusts

Posted on May 19, 2009
The new MacroShares Major Metro Housing Trusts will start trading soon, and I'm interested to see how they do. The trusts were created by Yale economist Robert Shiller's company, MarcoMarkets LLC. Two trusts will be issued?the Major Metro Housing Up Trust (fact sheet here) and the Major Metro Housing Down Trust (fact sheet here)...

TALF Expanded to Include Legacy CMBS

Posted on May 19, 2009
So sayeth the Fed:The Federal Reserve Board on Tuesday announced that, starting in July, certain high-quality commercial mortgage-backed securities issued before January 1, 2009 (legacy CMBS) will become eligible collateral under the Term Asset-Backed Securities Loan Facility (TALF)...

New CDS Data

Posted on May 18, 2009
The BIS released its much-anticipated semiannual report on OTC derivatives today. It measures notional amounts and gross market values outstanding of OTC derivatives as of December 31, 2008.For the credit default swap (CDS) market, the gross market value?which measures "the cost of replacing all existing contracts and [is] thus a better measure of market risk than notional amounts outstanding?is $5...

Grandstanding

Posted on May 12, 2009
The video of Rep. Alan Grayson grilling the Inspector General of the Fed Board of Governors, Elizabeth Coleman, has been making the rounds. Grayson says that there's a Bloomberg article which says that the Fed has entered into $9 trillion of off-balance sheet transactions, and asks Coleman if she has investigated those transactions at all...

2 + 2 = CDS Are Evil!

Posted on May 12, 2009
I love the logic of the anti-CDS crowd.First, they claimed CDS were evil because protection buyers weren't required to own the underlying bond?they were mostly used for pure "speculation" rather than hedging. The anti-CDS crowd frequently cited Eric Dinallo's claim that 80% of CDS are held by investors who don't own the underlying bond ("naked CDS") as proof that CDS are evil...

Bank Holding Companies (Again)

Posted on May 08, 2009
Serial bloviator Simon Johnson writes:In most countries, the course of action would be clear. The government would take over banks, remove ?bad assets? from their balance sheets, inject fresh capital, and put them bank into the private sector. This is essentially what the FDIC does when it takes over a bank...

Chrysler Holdouts Own No CDS on Chrysler

Posted on May 07, 2009
A group of dissident Chrysler bondholders opposing the Obama administration's restructuring plan?which refers to itself as the Chrysler Non-TARP Lenders?disclosed this interesting fact in a court filing yesterday:4. None of the Chrysler Non-TARP Lenders hold any credit default swaps or hedges with respect to their holdings of Senior Debt...

BofA Stress Test Result: $35 Billion Shortfall

Posted on May 06, 2009
So reports the Wall Street Journal:Regulators have told Bank of America Corp. that the company needs to take steps to address a roughly $35 billion capital shortfall based on results of the government's stress tests, according to people familiar with the situation...

Information Flows Up

Posted on May 06, 2009
It's amusing that Nouriel Roubini and Matthew Richardson dismiss the (leaked) forecasts in the stress test as not credible because they're not as dire as forecasts from the IMF and Roubini's RGE Monitor.Treasury and the Fed had access to more information about banks' balance sheets in conducting the stress tests than the IMF or RGE Monitor could ever dream of...

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