Legal Commentary

John Taylor: Giving Banks Money Hurts Banks

Posted on February 11, 2009
John Taylor undoubtedly made some great contributions to monetary economics?foremost among them being the famous Taylor Rule. But an astute observer of financial markets he is most certainly not. His diagnosis of the financial crisis is comical at best...

CMBS Fact of the Day

Posted on February 11, 2009
From 1995 to 2007, the average subordination level for AAA-rated CMBS tranches fell from 34.1% to 12.3%. (Data from Wachovia Capital.)I just thought you should know that, since the government has decided to get in the CMBS game. I hope you like risk....

Will Wilkinson's strange theory about Krugman

Posted on February 11, 2009
Will Wilkinson mocks Paul Krugman for not including political factors in his economic thinking:Perhaps more than any economist of his caliber, Krugman understands that policy is largely determined by the outcome of the public opinion shoutfest. Yet this recognition seems to have no effect on Krugman?s ideas...

Here We Go Again: Peterson's New CDS Bill

Posted on February 11, 2009
Rep. Collin Peterson, Chairman of the House Agriculture Committe, has introduced the final version of the Derivatives Markets Transparency and Accountability Act of 2009 (H.R. 977). The draft bill included an absurb attempt to ban so-called "naked" credit default swaps (though the bill was so incompetently drafted that it wouldn't actually have banned naked CDS)...

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A Structured Finance Bailout?

Posted on February 10, 2009
One of the things to watch for tomorrow when Geithner unveils the new bank bailout is whether the range of asset-backed securities (ABS) eligible for some form of government help is broadened. The Fed already announced a significant expansion of the Term Asset Backed Securities Lending Facility (TALF), with eligible collateral now including triple-A rated ABS backed by student loans, auto loans, credit card loans, and SBA-guaranteed 7(a) and 504 small business loans...

Update on CDS Clearinghouse

Posted on February 10, 2009
ICE Trust?which will presumably be the dominant CDS clearinghouse, since it has the backing of the major dealer banks? is struggling with the issue of how to price less liquid bespoke CDS contracts. From Bloomberg:Intercontinental Exchange Inc.?s planned clearinghouse for the $28 trillion credit-default swap market is stalled over pricing on less frequently traded contracts, Chief Executive Officer Jeff Sprecher said...

Via Matt Yglesias, here's "centrist"

Posted on February 09, 2009
Via Matt Yglesias, here's "centrist" Sen. Claire McCaskill's lame defense of her demands to cut the stimulus bill:She Tweets ?Just saw Krugman?s comments on reduction in recov act. Question for him. Would no stimulus act be better than one thats 800 B instead of 900...

Executive Pay

Posted on February 08, 2009
Outrage over exhorbitant executive pay at companies receiving TARP funds is entirely justified. But realistically, the government will never be able to restrict executive pay, and anyone who thinks otherwise is delusional. There are entire companies, not to mention entire legal departments, dedicated to structuring compensation packages that circumvent U...

Breaking News: Male Traders Like To Take Risk

Posted on February 08, 2009
It's always amusing when journalists discover that male traders?get this!?like to take on risk. Yes, and in other news, a new study says that bears tend to shit in the woods. Nick Krstoff (who I actually think is one of the best columnists around) takes his turn on this subject in his latest column:[A recent] study also suggested that elevated testosterone levels could lead to greater assumption of risk; high testosterone levels ?may shift risk preferences and even affect a trader?s ability to engage in rational choice...

Michael Steele: Government Jobs Aren't Really "Jobs"

Posted on February 08, 2009
Am I crazy, or did newly-elected RNC chair Michael Steele actually argue on ABC this morning that government jobs aren't really jobs?I'm paraphrasing, but Steele basically argued that the stimulus bill won't create any jobs because the government would only be hiring people for a couple years, and jobs with a "fixed period" of time don't count as real jobs...

Waldmann on CDS

Posted on February 07, 2009
Robert Waldmann responds to my comments on CDS (which were a continuation of an exchange in the comments section).I must admit, though, I'm a bit puzzled by some of his responses. This, for instance:In particular I think the pricing of debt implied by the CDS market was totally wrong...

Battleship and Rating Agencies

Posted on February 07, 2009
Last summer, the SEC proposed new rules for credit rating agencies, and last week it published the final rules. The new rules are aimed at, among other things, conflicts of interests in the rating process. Specifically, the new rules prohibit rating agencies from issuing or maintaining a credit rating where the rating agency (or a person associated with the rating agency):"made recommendations to the obligor or the issuer, underwriter, or sponsor of the security about the corporate or legal structure, assets, liabilities, or activities of the obligor or issuer of the security...

London

Posted on February 06, 2009
I'm still stranded in London, unfortunately, but my three extra days here have taught me two important lessons:1. Even in miserable weather, British people are still extremely polite.2. British TV is terrible. I'm sorry, but it's true.

WSJ on Boaz Weinstein

Posted on February 06, 2009
The WSJ has a long piece on Boaz Weinstein's tenure at Deutsche Bank. Weinstein was DB's "star trader" for a few years?right up until he managed to lose $1.8 billion.So how did Weinstein lose $1.8 billion? The same way every "star trader" loses a boatload of money: they make a lot of money exploiting arbitrage opportunities in good times, and then lose it all when their market goes berserk in a crisis...

Bipartisanship!

Posted on February 06, 2009
Newspapers have been quick to note the bipartisan makeup of Obama's new Economic Recovery Advisory Board, emphasizing that the Board includes even well-known Republican economist Martin Feldstein.What other board does Feldstein sit on? AIG.But does he sit on any of AIG's board committees? Yep, the Finance Committee...

Worst Sales Pitch Ever

Posted on February 05, 2009
A friend sends along what has to be the least attractive description of an investment firm's strategy ever:We invest in what we believe to be the premier asset-backed securities in the world - U.S. residential mortgage-backed securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae...

False Dilemma

Posted on February 05, 2009
Dick Cheney is still the master of the false dilemma, as his recent interview with The Politico demonstrates:?When we get people who are more concerned about reading the rights to an Al Qaeda terrorist than they are with protecting the United States against people who are absolutely committed to do anything they can to kill Americans, then I worry,? Cheney said...

Eric Cantor: Douchebag Extraordinaire

Posted on February 05, 2009
Last week, when the House was debating the stimulus bill, Marc Ambinder conducted an interview with Rep. Eric Cantor, the Republican Whip. Cantor's response (or lack thereof) to a simple question about government transfers is very telling:[Ambinder:] Another plank in your proposal is to get rid of the tax on unemployment benefits...

House Bill Limiting CDS Speculation

Posted on February 05, 2009
I was working on other things this week, so I didn't get a chance to comment on Rep. Collin Peterson's draft bill aimed at limiting speculation in credit default swaps (CDS). The bill is poorly drafted, to say the least. The operative language appears in Section 16, entitled "Limitation on Eligibility to Purchase A Credit Default Swap":It shall be unlawful for any person to enter into a credit default swap unless the person would experience financial loss if an event that is the subject of the credit default swap occurs...

Random Thought

Posted on February 02, 2009
Is there any way Heathrow isn't the worst airport in the history of the world?I mean, O'Hare was in the running for a while there, but it seems to me that over the past 5 years, Heathrow has really pulled out all the stops. Its lead is pretty much insurmountable now.

Ed Glaeser on Bob Ellickson

Posted on February 02, 2009
Kudos to The New Republic for letting one giant in urban economics (Glaeser) review a book by another giant in urban economics (Ellickson). Not surprisingly, Glaeser is a fan of Ellickson's latest.With regard to the current foreclosure crisis, Glaeser advocates using a form of shared appreciation mortgages (SAM):The best that can be done, I think, is to create an as-if situation that gets servicers to act like local banks...

Soros is wrong

Posted on January 30, 2009
Unless I'm misreading him, George Soros is just plain wrong about this:Going short on bonds by buying a CDS contract carries limited risk but unlimited profit potential; by contrast, selling credit default swaps offers limited profits but practically unlimited risks...

Tax Rebates as Stimulus

Posted on January 30, 2009
It's very difficult to get truly objective, nonpartisan analysis of stimulus issues. Most people look to the CBO for authoritative, unbiased analysis. While I respect the CBO and think it's reputation or honesty is well deserved, I also know that bills are often drafted with the CBO's scoring methodology specifically in mind...

Is the CDS market the root of problems in other markets?

Posted on January 30, 2009
No, according to this article in the most recent Journal of Fixed Income:This article investigates volatility transmission among the credit default swap (CDS), equity, and bond markets, using a multivariate GARCH model. The authors hypothesise that volatility in the bond and equity markets can originate from the CDS market where there is potential insider trading and increased trading activity due to private credit information...

Upfront CDS: Live in March

Posted on January 30, 2009
"Overhaul" of the CDS market, including upfront CDS (which I discussed at length the other day) and a formal Determinations Committee, to come in March. From Bloomberg:Dealers plan to overhaul credit- default swaps in March to curb risks in the $28 trillion market, making the derivatives more like bonds and creating a committee that will arbitrate disputes...

The EU blinks

Posted on January 28, 2009
Last week, after the major CDS dealers refused to commit to a firm mid-year deadline for the introduction of a European clearinghouse, the EU threatened to introduce legislation mandating central clearing for CDS:Barring a last minute change of heart by dealers, EU Internal Market Commissioner Charlie McCreevy will propose that a provision for mandatory clearing be inserted into the reform of EU bank capital rules the European Parliament and EU states are now adoptingThe dealers, however, were not impressed:"It's a certainty the market will move without a mandate but the dealers will do it on their own terms and their own timetable," one dealing company said...

FDIC May Run the "Bad Bank"

Posted on January 28, 2009
The FDIC wants to run the "bad bank" the government might set up:The Federal Deposit Insurance Corp. may manage the so-called bad bank that the Obama administration is likely to set up as it tries to break the back of the credit crisis, two people familiar with the matter said...

Upfront CDS with Fixed Coupons

Posted on January 28, 2009
I must admit, I never thought it would actually happen. But the most liquid single-name CDS are now expected to move to fixed coupons with upfront payments in the not-too-distant future. The fixed coupons will supposedly be set at 100bps and 500bps (depending on credit quality)...

Upfront CDS with Fixed Coupons

Posted on January 28, 2009
I must admit, I never thought it would actually happen. But the most liquid single-name CDS are now expected to move to fixed coupons with upfront payments in the not-too-distant future. The fixed coupons will supposedly be set at 100bps and 500bps (depending on credit quality)...

Real Estate Derivatives

Posted on January 27, 2009
Nice piece by Zachary Karabell in Newsweek about Robert Shiller's push to establish a liquid market in real estate derivatives. Shiller has long been a leading proponent of real estate derivatives. I've plugged real estate derivatives before, and I still think it's important that homeowners have a way to reduce their exposure to fluctuations in the local housing market...

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