My vacation reading

I am back from my vacation. I did not read email and newspapers while on vacation, but I did read some blogs and web sites selectively. I also used the opportunity to catch up on some reading material that I had not been able to finish before I began my vacation. As could be expected, my vacation reading was dominated by the global financial turmoil. Some of the more interesting stuff that I read:

• Socgen put out the final report (Part 1, 2 and 3) of its internal investigations. This report is more sensible than Socgen’s earlier “non explanations” as I called them in my blog.
• The Financial Services Authority (FSA) in the UK put out a heavily redacted version of its internal review on the supervision of Northern Rock. This is certainly more informative than the executive summary that I dismissed as uninteresting in March. I still disagree with much of what they are saying.
• Davidoff’s Deal Professor column in the New York Times Dealbook calls for a complete rethink of the SEC’s takeover regulations in the US. He is absolutely right and a similar rethink is required in many other jurisdictions including India.
• The gloom surrounding the sub prime crisis calls for some humour and I enjoyed Macroman’s modern nursery rhyme on the house that Jack built.
• David Murphy’s draft paper on the credit crunch was enlightening. I especially liked his description of SIVs as the “The New Way of Doing Old Style Banking”.
• FT Alphaville reported at length on the computer bug in Moodys rating of CPDOs and their attempt to cover this up.
• In this light, the agreement arrived at by the New York Attorney General with the rating agencies on rating securities based on residential mortgages appeared to many observers too little too late.
• However, the New York Attorney General did make almost irrelevant IOSCO’s consultation report on “The role of credit rating agencies in structured finance markets” and the subsequent changes in the code of conduct. IOSCO also published a report on the subprime crisis.
• The OECD’s Financial Markets Trends published a revised estimate of the size of the subprime crisis.
• Reinhart and Rogoff’s study of eight centuries of financial crises is most useful. The 12-page bibliography itself will keep many of us busy for a while.
• Andrew Kuritzkes and Til Schuermann wrote a fascinating paper on “What we know, don’t know and can’t know about bank risk” using quarterly earnings data for 20 years for 300+ U.S. bank holding companies that had total assets of at least $1bn. I suspect that earnings volatility understates default risk, but the relative contribution of different kinds of risk is still highly valuable.
• Many blogs referred to an interesting story in the Wall Street Journal that provided a rare behind the scenes view of how the US FDIC handled the closure of First Integrity Bank. Many of us had marvelled at the FDIC’s ability to do bank closures quickly and smoothly, and the WSJ story unravelled this mystery to some extent.
• Andrew Clavell at Financial Crookery provided an interesting analysis of Warren Buffet’s huge derivative trades that I blogged about in March. He points out quite unsurprisingly that the position is basically a vega play as the delta is extremely low. The interesting twist is the sensitivity to the dividend yield (known as phi or lambda). Clavell suggests a a fixed for floating dividend swap to offset the negative dividend growth rate locked into the option price. The very fact that somebody can suggest such a swap to Buffet tells us something interesting about how Buffet is perceived in the markets today. Incidentally, the market attaches a higher default probability to Berkshire Hathaway than to Brazil. In May 2008, Brazil priced a 10-year bond at 15 basis points tighter than a deal of the same maturity launched by Berkshire Hathaway Finance at nearly the same time.

Posted at 8:46 pm IST on Sun, 8 Jun 2008         permanent link

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