aig rescue September 16, 2008
Posted by Bradley in : markets , add a commentSome firms really are too big to fail. But after years of debate about the Washington consensus, it’s striking to see a US based insurance company acquired by the US Government. The Fed announced a loan of up to $85 billion to AIG:
The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.
fairtrade in the city of london August 6, 2008
Posted by Bradley in : markets , add a comment
The City of London Fairtrade Steering Group has a really beautiful website. But the latest item on the news and events page is dated March 2008. More form than substance?
iif final report July 18, 2008
Posted by Bradley in : markets , add a commentThe IIF published its final (long) Report on Principles of Conduct and Best Practice Recommendations yesterday (this report follows April’s interim report). The report combines a set of principles with some recommendations and some lobbying (labelled “consideration for the official sector”). The principles are general and the report states that the recommendations may not be appropriate for all firms - they are “benchmarks”.
Many of the principles are so general as to be pretty meaningless. Principle I.i states:
A robust and pervasive risk culture throughout the firm is essential. This risk culture should be embedded in the way the firm operates and cover all areas and activities, with particular care not to limit risk management to specific business areas or to restrict its mandate only to internal control.
competitiveness through working groups July 14, 2008
Posted by Bradley in : markets , add a commentMaking London competitive as a financial centre seems to be a very complex job, requiring lots of working groups of important people: there is to be a new Financial Services Global Competitiveness Group, which:
will report directly to the High Level Group on City Competitiveness, which was set up by the Government in 2006 to develop and support a strategy for promoting London as a world-leading financial centre.
In addition, there will be a Professional Services Industry group, and a working party to review the efficiency of the UK’s capital raising process, a group focusing on the UK-based wholesale financial services industry and another to concentrate on the insurance sector. The capital raising group:
will examine current market practices concerning equity capital raising by public companies, and report on whether changes are needed to UK company law, market practices or regulatory requirements to make equity capital raising more efficient and orderly.
the limits to libor April 17, 2008
Posted by Bradley in : markets , add a commentThe story that banks may not have been reporting rates accurately for the construction of libor is, as Paul Krugman notes, worrying. Worrying because it suggests that the funding situation for major banks (in the interbank market) is worse than we know. Worrying because some of this problem is caused by a lack of confidence in banks and the financial system generally. Worrying because if it turns out to be true that some of the major banks which are members of the BBA’s contributor panels have been quoting inaccurate rates then confidence will, justifiably, suffer even more than it already has.
The underquoting risk was suggested, for example in an article by Jacob Gyntelberg and Philip Wooldridge in the BIS Quarterly Bulletin:
The widespread use of fixings as reference rates also gives contributing banks an incentive to misquote. The costs of manipulating a given rate might be outweighed by the potential profit from positions based on those rates … For example, market participants with large positions in derivative contracts referencing a rate fixing might seek to move the fixing higher or lower by contributing biased quotes. Alternatively, they might indirectly influence the accuracy of the fixing by choosing not to join the contributor panel.
The scope for such strategic behaviour to influence the fixing can to some extent be limited by trimming, in which biased or extreme quotes are disregarded. However, even trimmed means can be manipulated if contributor banks collude or if a sufficient number change their behaviour.
The description of such underquoting as merely “strategic behaviour” is troubling to me, when the higher rates might suggest a market perception of counterparty risk that might be material to investors in an underquoting bank’s securities. Surely it is more serious, more troubling, than just strategic behaviour? But the idea that it may be acceptable for a borrower to manipulate the appearance of its creditworthiness has surfaced before. Another author, writing in the BIS Quarterly Review in 2006 stated that a utilisation fee for a loan:
enables the borrower to announce a lower spread to the market than what is actually being paid, as the utilisation fee does not always need to be publicised.
Is there a way to rescue BBA libor? The BBA does have the ability to exclude banks from its contributor panels, although deciding whether or not to do so must be a complex problem, particularly given the profiles of the banks in question.The BBA’s US dollar panel is: Bank of America, Bank of Tokyo – Mitsubishi UFJ, Barclays Bank plc, Citibank NA, Credit Suisse, Deutsche Bank AG, HBOS, HSBC, JP Morgan Chase, Lloyds TSB Bank plc, Rabobank, Royal Bank of Canada, The Norinchukin Bank, The Royal Bank of Scotland Group, UBS AG, and West LB AG.
Over the last few months, 3 month libor has often been significantly higher than the effective federal funds rate. So, from the perspective of mortgage borrowers with libor-based mortgage loans, as the WSJ points out, lower rates produced by any underquotes are a good thing.
private sector response to financial market issues March 4, 2008
Posted by Bradley in : markets , add a commentVia the FT:
Leading investment bankers are proposing new guidelines on pay and bonuses in the financial sector as they seek to head off a growing political backlash against what were seen as excessive rewards for bankers whose risk-taking helped cause the credit crunch.
In particular, the Institute of International Finance, a global association of banks, is seeking to create a code of best practice, which would discourage banks from giving incentives to traders to take excessively risky bets while failing to censure them if these turn sour.
nothing new? February 14, 2008
Posted by Bradley in : markets , add a commentYesterday, Dominique Strauss-Kahn, the Managing Director of the IMF gave a speech in which he focused on the current world financial problems:
The challenges that the Fund and its members face … have changed. In its early years, the crises that our members faced were mostly current account crises. Large scale capital movements between countries were relatively rare, and financial institutions tended to be national rather than international. And transmission of problems from the national to the global level was relatively slow. Obviously that is no longer the case.
..If we look now at the current financial crisis from this perspective we can see that what began as a problem in a single sector in a single economy—the housing market in the United States—has become a global problem. And what was first manifested as a problem for financial institutions is now becoming a problem for economies. This is obviously the case in the United States. I believe that the effects will be felt increasingly in Europe. And I do not think the emerging economies are immune from this crisis.
.. The lesson I draw from this is that we have to look for both the causes and the cures of crises in the interaction of national and global developments and in the interaction of economic and financial market developments.
.. Let me be more specific. The present crisis is the result of a perfect storm: a macroeconomic environment with a prolonged period of low interest rates, high liquidity and low volatility, which led financial institutions to underestimate risks, a breakdown of credit and risk management practices in many financial institutions, and shortcomings in financial regulation and supervision.
How new is all this? An acceleration or magnification, but not essentially really new. What is different is the enormous amount of energy that has been dedicated (apparently not too successfully) to ensuring financial stability through regulation in recent years. More than half a century ago, Karl Polanyi wrote:
By the fourth quarter of the nineteenth century, world commodity prices were the central reality in the lives of millions of Continental peasants; the repercussions of the London money market were daily noted by businessmen all over the world; and governments discussed plans for the future in light of the situation on the world capital markets. Only a madman would have doubted that the international economic system was the axis of the material existence of the race.
financial risk outlook January 29, 2008
Posted by Bradley in : markets , add a commentAs Americans ponder the state of the economy over their kitchen tables, the FSA publishes its Financial Risk Outlook for 2008. Last year’s version had pictures of buildings and bridges, and 2006 was architectural too. This year’s document is full of transport-related pictures, including one of an escalator (a down escalator (!)) at around the point where last year’s outlook had an attractive archway. There is a colourful picture of traffic lights to relieve the gloom. Some of the risks that the FSA notes relate to the position of consumers. For example, the FSA notes declining confidence (among consumers and market participants, and likely problems associated with high levels of consumer debt. The FSA also states :
Our assessment so far is that, while many firms have made progress on building the fair treatment of customers into their culture, there is little evidence that firms’ work on treating customers fairly is translating into improved outcomes for retail consumers.
credit market turmoil December 13, 2007
Posted by Bradley in : markets , add a commentIt’s like being on the other side of the looking glass: while Calculated Risk reports that people are raiding their 401(k)s “to pay bills”, it looks as though the UK Government may be going to nationalise Northern Rock (and see Peston’s Picks here on this topic).