The ugly truth revealed in Rolling Stone. It's a long article but worth the read.
All very depressing, especially in light of the most recent scandal involving forex market rigging by various UK banks.
Basically, despite the largest financial crisis since the great depression, nothing has changed and the regulators seem happy with that outcome.
Showing posts with label financial crisis. Show all posts
Showing posts with label financial crisis. Show all posts
Thursday, November 13, 2014
Tuesday, June 19, 2012
The Senate "grills" Jamie Dimon about JPM losses
There really is no hope for any sensible and meaningful financial market reform.
| The Daily Show with Jon Stewart | Mon - Thurs 11p / 10c | |||
| Bank Yankers - Jamie Dimon on Capitol Hill | ||||
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Wednesday, May 16, 2012
Tuesday, May 8, 2012
Thursday, May 3, 2012
How is financial reform coming along...?
How timely - just as I posted on the financial reform of Wall Street (or lack thereof), Felix Salmon has a post on the same topic - much more informative than mine of course. He actually cites people in the know!
Money Power and Wall Street - a few thoughts
I caught the final episode of Money Power and Wall Street on Frontline last night (thanks to my DVR). If you missed it you can watch it on the PBS website.
Overall, I thought it was pretty good. The documentary showed that private derivatives - custom made for a client - make up the largest part of bank's profits. In particular the documentary focused on interest rate swaps and the numerous municipalities (here and abroad) that had been caught out after buying one of these things.
I was actually pretty surprised at how naive some of the buyers of these swaps were. Basically they were swapping a higher fixed rate for a lower variable rate. This is fine as long as rates stay low, but of course when the financial markets collapsed, all rates (except the US government bond rate) went through the roof. In my opinion, municipalities have no business swapping fixed payments for variable rates. In effect they are saying, "hey - we'll take the interest rate risk in exchange for lower payments today". That's not the job of local government. Of course the slick sales force of the banks coupled with a little bit of bribery helped make the case for these products.
The complexity and vastness of the wall street machine also was pretty apparent and that this complexity makes it incredibly hard for regulators to keep up with new products and markets that are being developed all the time. In addition, the global nature of the banking business means that many banks could just move part of their derivative shops to London to avoid the closer scrutiny of US regulators.
Going forward, it was clear that nothing has really changed. The Dodd Frank Act is unlikely to change much behavior, and the incentives to make large amounts of money quickly will no doubt drive yet another generation of bankers to create ever more elaborate products to sell to unsuspecting customers.
Personally, I think we should reinstate Glass Steagall and separate out commercial banking (loan making etc) from investment banking. I also think that we should impose increasing capital requirements on banks that increase with the size of the bank to make it costly to be too big to fail. Finally, I think investment banks should go back to being organized as partnerships and not as corporations. Under the partnership model, the partners were always on the hook for the risks taken by the bank.
I have zero confidence in any of these things happening however.
Overall, I thought it was pretty good. The documentary showed that private derivatives - custom made for a client - make up the largest part of bank's profits. In particular the documentary focused on interest rate swaps and the numerous municipalities (here and abroad) that had been caught out after buying one of these things.
I was actually pretty surprised at how naive some of the buyers of these swaps were. Basically they were swapping a higher fixed rate for a lower variable rate. This is fine as long as rates stay low, but of course when the financial markets collapsed, all rates (except the US government bond rate) went through the roof. In my opinion, municipalities have no business swapping fixed payments for variable rates. In effect they are saying, "hey - we'll take the interest rate risk in exchange for lower payments today". That's not the job of local government. Of course the slick sales force of the banks coupled with a little bit of bribery helped make the case for these products.
The complexity and vastness of the wall street machine also was pretty apparent and that this complexity makes it incredibly hard for regulators to keep up with new products and markets that are being developed all the time. In addition, the global nature of the banking business means that many banks could just move part of their derivative shops to London to avoid the closer scrutiny of US regulators.
Going forward, it was clear that nothing has really changed. The Dodd Frank Act is unlikely to change much behavior, and the incentives to make large amounts of money quickly will no doubt drive yet another generation of bankers to create ever more elaborate products to sell to unsuspecting customers.
Personally, I think we should reinstate Glass Steagall and separate out commercial banking (loan making etc) from investment banking. I also think that we should impose increasing capital requirements on banks that increase with the size of the bank to make it costly to be too big to fail. Finally, I think investment banks should go back to being organized as partnerships and not as corporations. Under the partnership model, the partners were always on the hook for the risks taken by the bank.
I have zero confidence in any of these things happening however.
The multimillionaire men of Lehman
What the top 51 non-C level employees of Lehman made. Notably there is only one woman in the list.
Quote:
One can’t help but suspect that the all-male culture at the upper reaches of Lehman was a corrosive and damaging thing, which in some way helped lead to the bank’s demise.
Quote:
One can’t help but suspect that the all-male culture at the upper reaches of Lehman was a corrosive and damaging thing, which in some way helped lead to the bank’s demise.
Tuesday, May 1, 2012
Black Scholes caused the crash?
In an interview on Radio 4 (the UK's equivalent of public radio), Ian Stewart, a Maths prof from Warwick Uni in the UK argues that the Black Scholes equation was a "dangerous invention". This argument has been trotted out numerous times, and frankly it is pretty silly. It's like saying that the Wright Brothers are responsible for airliner crashes.
The article talks about LTCM (Long Term Capital Management) and how the failure of that hedge fund was in part due to its usage of Black Scholes. I disagree. The failure of LTCM was due to excessive leverage. The recent market crash also had little to do with Black Scholes, but was again due to excessive leverage by banks and people as well as a complete failure of risk management.
I've posted on this before - here and here. I am sure this isn't the last we'll here of this.
The article talks about LTCM (Long Term Capital Management) and how the failure of that hedge fund was in part due to its usage of Black Scholes. I disagree. The failure of LTCM was due to excessive leverage. The recent market crash also had little to do with Black Scholes, but was again due to excessive leverage by banks and people as well as a complete failure of risk management.
I've posted on this before - here and here. I am sure this isn't the last we'll here of this.
Monday, April 30, 2012
Tuesday, April 24, 2012
Money Power and Wall Street - Tonight on Frontline
Set your DVR - tonight on Frontline: the first part of "Money Power and Wall Street".
Monday, April 2, 2012
Boomerang (book)
I'm currently reading Michael Lewis' book "Boomerang - travels in the new third world". This is an excellent and very amusing discussion of what went wrong in Iceland, Greece and Ireland (and others). It's not a detailed macroeconomic exposition, but if you want a fun and relevant read, I recommend it.
Monday, December 19, 2011
How much has Buffet lost on BofA?
In typical NewsCorp form, a Wall Street Journal headline states that:
"Warren Buffett Is $1.5 Billion Underwater on His Bank of America Stock
Huh? I said to myself, I didn't think Warren had bought B of A common - his recent deal involved preferred stock and warrants.
Reading a bit further into the article reveals that in fact that author is talking about Warren's position in warrants and not in common stock. The headline is not only misleading, it's pretty inaccurate as well.
As a side note, the funny thing though is that the Business Insider Blog presumably didn't read it all the way through when this post first appeared. The article was rewritten with the apology that "This article originally stated that Buffett had lost money on his investment. We apologize for the error."
Anyhow, back to Warren's warrants. To state that he is $1.5 Billion underwater is a bit of a stretch. He bought 700 million warrants at a strike price of $7.14. The current B of A stock price is currently about $5.00. So (7.14-5)*700 million = $1.5 Billion.
But this doesn't mean that he has lost $1.5 Billion on the options. As my MBA students should know, how much an option changes in value for a $1 change in the underlying stock price is given by the option's delta. Only if the delta equaled 1 would Warren's warrants have declined by $1.5 Billion.
Valuing these long term options is pretty tricky, but if we assume a delta of say 0.5 (which is probably reasonably close) then the decline in value of Warren's warrants is about (7.14-5)*700*0.5 = $ 750 Million. Still a lot of money, but not as much as reported before.
For extra credit - under what circumstances could these warrants have actually increased in value? Hint (we'd need to see a major increase in one of the other Black Scholes inputs). For even more extra credit - how would this change have affected his other investment in the preferred stock?
But this doesn't mean that he has lost $1.5 Billion on the options. As my MBA students should know, how much an option changes in value for a $1 change in the underlying stock price is given by the option's delta. Only if the delta equaled 1 would Warren's warrants have declined by $1.5 Billion.
Valuing these long term options is pretty tricky, but if we assume a delta of say 0.5 (which is probably reasonably close) then the decline in value of Warren's warrants is about (7.14-5)*700*0.5 = $ 750 Million. Still a lot of money, but not as much as reported before.
For extra credit - under what circumstances could these warrants have actually increased in value? Hint (we'd need to see a major increase in one of the other Black Scholes inputs). For even more extra credit - how would this change have affected his other investment in the preferred stock?
Tuesday, December 6, 2011
Is the Administration's mortgage refinancing plan working?
Back in October, the Obama Administration extended the HARP (Home affordable refinance program) to allow homeowners to refinance if even if their mortgages were underwater. This change had a direct effect on the mortgage market. Specifically, mortgage securities with high coupons (where the homeowners were paying high interest rates) fell in value. This was because the market anticipated that a greater number of these homeowners would be able to refinance their loans at lower rates. Previously they had been unable to do so because their loans exceeded the value of their homes. I blogged about this back then and it appeared to be a classic case of negative convexity in the MBS market.
Now comes the news that the market has largely recovered. The amount of expected refinancings will fall far below those initially predicted, apparently in large part due to the decreased credit scores of many homeowners.
(note link to FT website will require you create a free account to view the article).
Now comes the news that the market has largely recovered. The amount of expected refinancings will fall far below those initially predicted, apparently in large part due to the decreased credit scores of many homeowners.
(note link to FT website will require you create a free account to view the article).
Monday, October 31, 2011
Bank of America - up to no good.
Bank of America apparently just shifted a huge block of Merrill Lynch derivatives to a bank unit funded by federally insured deposits. In other words, moral hazard reared its ugly head again and B of A took advantage of the Governments deposit insurance program to placate some counter-parties. Nice work B of A.
In unrelated news, I've transferred all my bill pay stuff from my previously bankrupt bank to the local credit union. I'll be closing my bank account this week.
In unrelated news, I've transferred all my bill pay stuff from my previously bankrupt bank to the local credit union. I'll be closing my bank account this week.
Wednesday, September 28, 2011
Goodbye Wachovia
Here in Raleigh NC, the Wachovia building has long dominated the downtown skyline. Not anymore. It's now the Wells Fargo building. My local newspaper has a nice set of pictures showing the transformation.
Thursday, September 22, 2011
The Greek default
My colleague, Steve Allen has an excellent discussion of the impending Greek default. Bottom line. It isn't going to be pretty. Everyone will get hurt. Why - well it turns out that everyone is involved in some way. JP Morgan tried to explain it with Lego figures. Click here for an explanation.
Wednesday, September 14, 2011
Merrill Lynch and Lehman buyouts, 3 years later.
New York Times discusses how a couple of marriages from the financial crisis are working out.
Friday, August 26, 2011
A great analysis of the BRK - BAC deal
Aswath Damodaran - NYU expert on valuation - provides a really great analysis of the Berkshire Hathaway - Bank of America deal that I blogged on yesterday. Aswath values the options at around $3 billion which means that Buffet got the preferred stock for only $2 billion. At that price the yield is around 15%! My own back of the envelope calculations came in around $8-9 billion for the deal - so basically, BAC shareholders just handed Buffet a nice gift of around $3 to $4 billion dollars.
Aswath concludes that this probably wasn't a good deal for BAC and I'm inclined to agree with his analysis - paying about $4 billion for the Buffet seal of approval seems pretty high.
Aswath concludes that this probably wasn't a good deal for BAC and I'm inclined to agree with his analysis - paying about $4 billion for the Buffet seal of approval seems pretty high.
Thursday, August 25, 2011
Berkshire Hathaway buys BAC Preferred Stock and Warrants for $5bn.
Bank of America has been in trouble of late because of ongoing subprime losses. The Bank needed a significant cash boost. Warren Buffet has just provided that boost in the form of $5 billion of cash. The deal is pretty straightforward (full details are here).
So basically BAC issued preferred stock that pays a $300 Million dividend and together with 700 million calls with a strike of $7.14.
You don't have to be a financial rocket scientist to realize that this is a good deal, but I'll leave it as an exercise for my students to try to figure out what this deal is really worth.
CHARLOTTE, N.C., Aug 25, 2011 (BUSINESS WIRE) --Bank of America Corporation announced today that it reached an agreement to sell 50,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 6 percent per annum, payable in equal quarterly installments, and is redeemable by the company at any time at a 5 percent premium.
In conjunction with this agreement, Berkshire Hathaway will also receive warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.142857 per share. The warrants may be exercised in whole or in part at any time, and from time to time, during the 10-year period following the closing date of the transaction. The aggregate purchase price to be received by Bank of America for the preferred stock and warrants is $5 billion in cash.
So basically BAC issued preferred stock that pays a $300 Million dividend and together with 700 million calls with a strike of $7.14.
You don't have to be a financial rocket scientist to realize that this is a good deal, but I'll leave it as an exercise for my students to try to figure out what this deal is really worth.
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