tag:blogger.com,1999:blog-30643134.post4943513400833286977..comments2023-12-26T01:10:26.319-05:00Comments on Accrued Interest: Bailouts, Wall Street, and the Bad MotivatorAccrued Interesthttp://www.blogger.com/profile/05096191765979971184noreply@blogger.comBlogger44125tag:blogger.com,1999:blog-30643134.post-28933190816370036982008-06-04T15:24:00.000-05:002008-06-04T15:24:00.000-05:00I find it interesting the both ICE and the CME gro...I find it interesting the both ICE and the CME group have purchased companies that specifically deal with deriviative products. ICE purchased Creditex and CME purchased Credit Market Analysis. I would expect the Fed to push for more CDS business to be exchange traded.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-54769750812581782642008-06-03T08:55:00.000-05:002008-06-03T08:55:00.000-05:00OK every one needs to simmer down or I'll send you...OK every one needs to simmer down or I'll send you to your corners.<BR/><BR/>Anon: The evidence is strong that Bear was looking at a profit in 1Q. The WSJ reported so last week. The story said that Schwartz was hoping that by reporting a profit it would calm the rumors.<BR/><BR/>That seems pretty reasonable evidence to me.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-78199841593655199792008-06-03T08:17:00.000-05:002008-06-03T08:17:00.000-05:00Anonymous - If you have any evidence to support yo...Anonymous - <BR/><BR/>If you have any evidence to support your assertions - let's see it! <BR/><BR/>But as far as unsupported tirades are concerned, I'd say you've made quota.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-40961684924723806962008-06-02T16:26:00.000-05:002008-06-02T16:26:00.000-05:00James Hymas:Read my lips. I did not have sex with...James Hymas:<BR/><BR/>Read my lips. I did not have sex with my intern. I am going to clean up Wall Street.<BR/><BR/>For God's sake, stop parroting political spin.<BR/><BR/>Yes, I am sure SEC Chairman Cox is toeing the party line. So what. See how many other lying politicians you can make links to.<BR/><BR/>If Cox had the first clue what was happening, then where was he as all these problems were developing? You are actually going to sit there at tell us that a man who didn't see the problem coming is now assuring us that the problem isn't so bad?<BR/><BR/>In the immortal words of Watergate's Deepthroat: Follow the Money.<BR/><BR/>All the senior managers of Bear said the firm was bankrupt. They all opted to sell their shares to JPM at the revised price of $10 -- which doesn't make any sense if they thought the firm was worth north of $30 that it was trading at before the bailout. They are voting with their wallets, which carries a lot more weight with intelligent people than political spin.<BR/><BR/>Jamie Dimon wouldn't touch Bear, even with the Fed pressuring him to do so, unless the Fed carved out the garbage.<BR/><BR/>Now that the cancerous assets are removed, and about half the staff unemployed, its not a surprise that the remaining pieces will add to JPM's earnings. It would be far more surprising if they didnt. Dimon cherry picked the good parts of Bear, and left all the problems with the Fed and/or creditors.<BR/><BR/><BR/>AI has worked pretty hard to make this blog successful. If its just going to turn into a Yahoo board where everyone mindlessly parrots the party line, all his work is wasted.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-53566102209960960992008-06-02T12:59:00.000-05:002008-06-02T12:59:00.000-05:00James:I agree that the run would have begun with L...James:<BR/><BR/>I agree that the run would have begun with Lehman had the Fed done nothing. So maybe I should say that I think Reason #1 was counterparty risk. Reason #2 was to avoid a run on someone else. But had #2 really been #1, the Fed might have pushed a different plan.<BR/><BR/>I also think its possible that we needed someone to fail to prove the Fed's resolve.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-83236878568284820332008-06-02T12:52:00.000-05:002008-06-02T12:52:00.000-05:00Well, we'll have to wait until Bernanke's memoirs ...Well, we'll have to wait until Bernanke's memoirs are published to get more information on the rationale behind the deal. But I suggest that if BSC had filed Chapter 11 on March 17 at 9:00am, the run on Lehman would have started on March 17 at 9:01am.<BR/><BR/>Profitable? It seems we agree. Illiquid? Of course. Insolvent? I think we're agreed ... but you're being a little coy!<BR/><BR/>The parallels to other banking panics are eerie - or they would be eerie if any banking panic was significantly different from any other. Consider <A HREF="http://academic2.marist.edu/foy/esopus/esop041.htm" REL="nofollow">Moore & Schley, 1907</A>: <I>Oliver Payne was a major stockholder in Tennessee Coal and Iron Company. During the 1907 panic, several banks were shaken and Moore & Schley, a speculative brokerage house was $25 million in debt. This was Payne's major stockbroker. Moore & Schley had used a gigantic majority stake in Tennessee Iron and Coal as collateral against loans. It looked as if the brokerage would have to place the bloc of stock on the market, which would have collapsed the market and ruined Moore & Schley, severely damaging Payne's finances. At Payne's either acquiescence or urging, J Pierpont Morgan hatched a scheme that would save Moore & Schley by eliminating its need to sell the Tennessee stock on the market; instead it would be sold to United States Steel. Meanwhile other trusts partners were expected to prop up the other weak banks. The scheme succeeded with a wink and a nod from the US President, and Payne's fortune remained intact, or else increased! </I><BR/><BR/>More links regarding the Tennessee Iron & Coal affair (which became a political football) <A HREF="http://www.prefblog.com/?p=1226" REL="nofollow">on my blog</A>.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-35737446438006962402008-06-02T10:46:00.000-05:002008-06-02T10:46:00.000-05:00James: I think the domino effect explains why the ...James: I think the domino effect explains why the Fed created the TSLF and TAF. Not why they felt compelled to bail out BSC counter-parties.<BR/><BR/>As to whether they were profitable, I think the answer was yes. As to whether they were liquid in the literal sense of the term, the answer is no. I mean, its impossible to say they were liquid when they were about to go BK. The real question is whether they would have been able to remain liquid had the TAF been up and running back in January. Or for that matter, had they raised $1bb in equity capital to improve their balance sheet. In otherwords, to what degree was it pure fear that drove them under?Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-4120465662903714422008-06-02T00:25:00.000-05:002008-06-02T00:25:00.000-05:00Anonymous 3:53:You may wish to read Cox's testimon...Anonymous 3:53:<BR/><BR/>You may wish to read <A HREF="http://www.sec.gov/news/testimony/2008/ts040308cc.htm" REL="nofollow">Cox's testimony to the Senate Committee on Banking</A>:<I>What happened to Bear Stearns during the week of March 10th was likewise unprecedented. For the first time, a major investment bank that was well-capitalized and apparently fully liquid experienced a crisis of confidence that denied it not only unsecured financing, but short-term secured financing, even when the collateral consisted of agency securities with a market value in excess of the funds to be borrowed. ... At all times during the week of March 10 — 17, up to and including the time of its agreement to be acquired by JPMorgan Chase, Bear Stearns had a capital cushion well above what is required to meet the Basel standards. Specifically, even at the time of its sale, Bear Stearns's consolidated capital, and its broker-dealers' net capital, exceeded relevant supervisory standards.</I><BR/><BR/>This analysis was accepted in the <A HREF="http://www.bankofengland.co.uk/publications/fsr/2008/fsrfull0804.pdf" REL="nofollow">Bank of England Stability Report</A> - their "Chart 11" is a sight to behold.<BR/><BR/>I have not seen any credible contradiction of the SEC's statement; perhaps you can provide a reference?<BR/><BR/>There is a very big difference between insolvency and illiquidity. <BR/><BR/>According to <A HREF="http://www.sec.gov/Archives/edgar/data/777001/000091412108000345/be12550652-10q.txt" REL="nofollow">the BSC 1Q08 10K</A>, BSC profit in the three months to Feb 29, 2008, was $110-million. <BR/><BR/>I also not from the <A HREF="http://www.sec.gov/Archives/edgar/data/777001/000119312508092860/ddefm14a.htm" REL="nofollow">proxy statement</A> (page 76) that the pro-forma goodwill to be assumed by JPM was negative $8,366-million; but "<I>JPMorgan Chase currently estimates the range of adjustments not reflected in the purchase price allocation presented above to be approximately $3 billion to $5 billion after-tax</I>"<BR/><BR/>It is my understanding that this has increased somewhat since then; but it should be remembered that terminating 6,400 (?) employees does not come cheap.<BR/><BR/>Finally, I note that <A HREF="http://files.shareholder.com/downloads/ONE/261082821x0x180609/8cbd90fb-0f16-4238-a908-e0a07a904682/JPM_Bear%20FINAL.pdf" REL="nofollow">JPM expects its earnings to increase by about $1-billion p.a.</A> upon full integration.<BR/><BR/>That's what I'm looking at. If you could provide links to what you're looking at, this would be greatly appreciated.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-23294429320757424182008-06-01T15:53:00.000-05:002008-06-01T15:53:00.000-05:00James Hymas: According to all the information avai...<I>James Hymas: According to all the information available, at the time of the crisis, BSC was both (i) solvent and (ii) profitable. </I><BR/><BR/>Thank you for your <I>opinion</I>, however the people with access to Bear's books thought and said differently.<BR/><BR/>Bear management went to the Fed and said they would need to file bankruptcy. Bear management had access to their books; while you didn't and still don't.<BR/><BR/>The Fed elected to bail Bear out-- again, the Fed had access to the books. No point in bailing out something that is solvent.<BR/><BR/>JPM... Jamie Dimon had a gun to his head (held by the Fed) to buy Bear. Even with that, he refused unless the Fed agreed to take $30 billion in cr@p. Jamie Dimon had access to Bear's books, you didn't and still don't.<BR/><BR/>Bear shareholders agreed to be bought out at $10 per share -- well below what Bear was trading at the Friday before bankruptcty. Interestingly, Bear senior management sold out their positions <I>BEFORE</I> the final meeting. Here are guys with the most access to the most information, far more than any market player or some guy writing in from Canada, and they chose to sell out.<BR/><BR/>According to official SEC filings and audited shareholder reports, Bear lost more money in the last few months of operations than they supposedly "earned" in the previous 8 years. If that is your definition of profitable, I would hate to think what you call a loss.<BR/><BR/>Please check your facts before you comment here.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-60412860261551915582008-06-01T12:17:00.000-05:002008-06-01T12:17:00.000-05:00To amplify my point about blind fear and confidenc...To amplify my point about blind fear and confidence, I will suggest that at the time there was strong possibility of "indirect contagion", if I can call it that.<BR/><BR/>If Bear Stearns had succumbed to the blind fear on the Street at the time, the next logical target would have been Lehman. Then ...<BR/><BR/>The first domino is the easiest one to stop.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-65290300284429046012008-06-01T10:47:00.000-05:002008-06-01T10:47:00.000-05:00Speaking more generally about the BSC affair, I de...Speaking more generally about the BSC affair, I detect a note of revisionism in this post - that is, the argument that BSC had to be kept solvent in order to prevent CDS market chaos and contagion.<BR/><BR/>That may well be part of the answer, but I think your original reaction in the post <A HREF="http://accruedint.blogspot.com/2008/03/precipice.html" REL="nofollow">The Precipice</A> was more to the point: <I>I will say that I wouldn't be a buyer of protection against any of the big banks or brokerages here. The Fed just delivered a big middle finger to people who bet against Bear Stearns.</I><BR/><BR/>According to all the information available, at the time of the crisis, BSC was both (i) solvent and (ii) profitable. <BR/><BR/>It was also greatly overleveraged, of course; it should definitely have had to pay an elevated rate for its financing but the fact that it couldn't find financing at all was due simply to blind fear.<BR/><BR/>Stepping in to situations like that and backstopping confidence in the financial system as a whole is the Fed's raison d'etre - you don't need to look for more complicated rationales.<BR/><BR/>Meanwhile, the derisory price given to the shareholders will serve as an object lesson to an entire generation of Wall Street treasurers. <BR/><BR/><I>Chris</I> - the deal with the banks throughout most of the world is that they get access to the discount in exchange for supervision and fairly strict regulation of their capital that has the intent of ensuring that even if they become illiquid, they do not (on the whole, as a group) become insolvent.<BR/><BR/>The credit crisis - and I think the critical element is not sub-prime, but the ability to short credit - has exposed weaknesses in the regulatory system, but no failures. Even UBS retained enough value that it could be recapitalized on the open market.<BR/><BR/>American - and all other - taxpayers already have a great deal: a mechanism whereby the desire of borrowers to finance long can be matched with the desire of lenders to lend short, via the banks. To allow the Fed - or any other central bank - to operate as a vulture fund carries extreme risks ... what happens if the Fed bails out its buddies at too high a price? To extend the Fed's mandate in such a manner introduces unnecessary complications to their already compex triple mandate.<BR/><BR/>Benefits to taxpayers? Start with 30-year mortgages that are funded by bond funds and 5-year deposits. The liquidity gap is enormous and would not exist if it were not for the ability of banks "to come crying to the govt for bailouts"Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-56033606126047031852008-05-30T07:18:00.000-05:002008-05-30T07:18:00.000-05:00Chris: Great idea, but somehow I doubt that's how ...Chris: Great idea, but somehow I doubt that's how it'll go down.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-69171601324643273192008-05-29T17:35:00.000-05:002008-05-29T17:35:00.000-05:00If, as you say, banks will need to be bailed out b...If, as you say, banks will need to be bailed out by the Fed from time to time, then we need to be perfectly clear about the economic system we have here. It's not a perfect capitalism, it a hybrid capitalist/socialist system, where the stock owners get profit and take some risk, but in times of extreme problem, the public (taxpayers) ultimately support the private banks. If that's the case then, the Fed should have a deal for the American people and instead of guarenteeing a loan, bought out Bear at firesale prices and gained the profit if it turned around and a couple years from now applied that profit to the national debt. If banks want to come crying to the govt for bailouts, they need to acknowledge who their daddy is, and give up some of that future profit. No reward no risk. If it's good enough for JP Morgan, it's good enugh for the American Taxpayer.Chrisfshttps://www.blogger.com/profile/00518482424112974379noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-39216830849118424242008-05-29T10:34:00.000-05:002008-05-29T10:34:00.000-05:00Funny aside... I was in a strategy meeting today a...Funny aside... I was in a strategy meeting today and somehow it came up that the CDS on the United States of America traded at 17bps at one point during the BSC mess. That exact number might be wrong, but it doesn't matter for this story.<BR/><BR/>Anyway, someone else says, "Who exactly is the counter-party on that trade?"Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-67476244290086369942008-05-29T07:56:00.000-05:002008-05-29T07:56:00.000-05:00There's large gap risk with options overnight for ...There's large gap risk with options overnight for sure and also options have tremendous pin risks on expiry with gamma going nearly infinite as you get to expiry. But the market participants know this and trade it...JoshKhttps://www.blogger.com/profile/17028441526311718240noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-48871789767209586442008-05-29T05:19:00.000-05:002008-05-29T05:19:00.000-05:00Sajal: One is a HY index, the other are CDS of two...Sajal: One is a HY index, the other are CDS of two specific brokerages. They aren't going to be perfectly correlated, especially considering how technical CDS trading is.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-60135574635000270132008-05-29T05:16:00.000-05:002008-05-29T05:16:00.000-05:00On the margin issue: Aren't naked options position...On the margin issue: Aren't naked options positions even more dangerous? In other words, I'm naked short a call on Monday and on Tuesday there is a merger announcement 40% above the previous close. Stuff like that is relatively common (compared with a sudden bankruptcy at least).<BR/><BR/>Now I'm asking because I honestly don't know. How do the options margin reqs work on the exchanges? Because I think that's the starting point for CDS margin.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-47705763011470652632008-05-28T18:45:00.000-05:002008-05-28T18:45:00.000-05:00I'm trying to reconcile the differences between th...I'm trying to reconcile the differences between the high yield spread being down:http://bespokeinvest.typepad.com/.shared/image.html?/photos/uncategorized/2008/05/27/high_yield_spreads_thru_0523.png<BR/><BR/>and CDS spread on LEH/MER shooting up last week:http://hussmanfunds.com/wmc/wmc080527a.jpg<BR/><BR/>Any opinions?<BR/><BR/>-SajalSajalhttps://www.blogger.com/profile/09709420216856464366noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-70988673270589545802008-05-28T17:36:00.001-05:002008-05-28T17:36:00.001-05:00If they had filed instead of being bailed out, pro...<I> If they had filed instead of being bailed out, protection sellers could have lost 40 points overnight (assuming 40ish recovery). If the exchange required 40% margin to protect against this eventuality, no one would trade CDS.</I><BR/><BR/>A solution to this - as far as the exchange / clearinghouse (CL) is concerned - is for the CL to settle net with its members ... in other words, if Merrill's clients have 100 shorts & 100 longs, then the CL's exposure to Merrill is zero - no collateral required. <BR/><BR/>Ensuring that Merrill's shorts have the ability to pay of Merrill's longs is Merrill's problem entirely.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-83908117700635651292008-05-28T17:36:00.000-05:002008-05-28T17:36:00.000-05:00AI said ""And LoanCo was a great idea."I didn't sa...AI said ""And LoanCo was a great idea."<BR/><BR/>I didn't say it wasn't. IMO, it sure is a much better idea than a govt. bailout. BTW, I like this definition of the govt. designed HOPE acronym...Help Obligated People Evade..!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-38409068469387544352008-05-28T16:56:00.000-05:002008-05-28T16:56:00.000-05:00This is a surreal blog post.The first rule when yo...This is a surreal blog post.<BR/><BR/>The first rule when you find yourself in a hole is: stop digging.<BR/><BR/>How can anyone argue the U.S. needs any more debt?<BR/><BR/>How can anyone argue the financial markets need to increase trading in a highly leveraged derivative whose underlying model is, lets be charitable here, a little suspect?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-63731029160050909752008-05-28T16:53:00.000-05:002008-05-28T16:53:00.000-05:00This comment has been removed by a blog administrator.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-10059989393607571032008-05-28T14:36:00.000-05:002008-05-28T14:36:00.000-05:00@David: Interest rate swap futures already exist, ...@David: Interest rate swap futures already exist, although I believe they are much less liquid than the OTC market. I don't know much about them though.<BR/><BR/>I think the inherent problem with margin requirements on CDS is that the payoff is binary. While it may be rare for a contract to go from a reasonable credit spread to default overnight, BSC would have been a perfect example. The Friday before the bailout, CDS was traded in the 700-800 range. Depending on the strike of the contract, that's in the neighborhood of 80-90 cents on the dollar in bond equivalent terms. If they had filed instead of being bailed out, protection sellers could have lost 40 points overnight (assuming 40ish recovery). If the exchange required 40% margin to protect against this eventuality, no one would trade CDS. If they required 10-15% margin as many dealers do, what guarantees that the protection buyer will be made whole? It would require massive amounts of capital for the exchange to guarantee all its contracts since one large corporate default would undoubtedly be followed by others.PNL4LYFEhttps://www.blogger.com/profile/10009165302340487456noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-91624584498365333312008-05-28T11:22:00.000-05:002008-05-28T11:22:00.000-05:00I think some firms took losses on ACA, but they we...I think some firms took losses on ACA, but they were so small. Refco also went under and left some people in the lerch. <BR/><BR/>And LoanCo was a great idea.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-87424993473404624732008-05-28T10:17:00.000-05:002008-05-28T10:17:00.000-05:00ACA failed and it didn't cause any major dislocati...ACA failed and it didn't cause any major dislocations. Counter-parties just bought replacement coverage somewhere else?<BR/><BR/>As for your exchange traded CDS, it sounds like a remake of your LoanCo idea last year.Anonymousnoreply@blogger.com