tag:blogger.com,1999:blog-4815867514277794362.post1185035587841614892..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: Liquidity and banks – a primerJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-4815867514277794362.post-55170092409587465402009-04-28T04:49:00.000+10:002009-04-28T04:49:00.000+10:00note that Mish is making the same mistake in this:...note that Mish is making the same mistake in this: http://globaleconomicanalysis.blogspot.com/2009/04/money-multipliers-velocity-and-excess.html<br /><br />quote: "Excess reserves are rising ... because banks are preparing in advance for future writeoffs, not because the increased demand for money means there is less money to lend."babar ganeshhttps://www.blogger.com/profile/01898299856773302141noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-82467448906380982292009-04-25T05:35:00.000+10:002009-04-25T05:35:00.000+10:00Is the banks' strong liquidity preference a reason...Is the banks' strong liquidity preference a reasonable one, considering that they are currently relying to a large extent on FDIC guarantees of their debt and an implicit "No More Lehmans" pledge to motivate investors to hold their debt? If bank debtholders started facing haircuts or forced equity conversions, as some observers are advocating, wouldn't the banks' cost of funding go through the roof? In that case, the more cash on hand, the better.o. natehttps://www.blogger.com/profile/08803577223028106635noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-55125313086610989772009-04-25T04:10:00.000+10:002009-04-25T04:10:00.000+10:00jh, is it not possible that BAC is holding cash no...jh, is it not possible that BAC is holding cash not in fear of runs (though useful if one comes) but in anticipation of further collateral postings -- not only on CDS but on interest rate swaps -- as credit deteriorates?gaius mariushttps://www.blogger.com/profile/10618655639631695070noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-50336733705889469902009-04-25T02:14:00.000+10:002009-04-25T02:14:00.000+10:00The opening ended selling of risk is the problem i...The opening ended selling of risk is the problem in the CDS market, not the CDS itself.<br /><br />If large institutions had to post the same collateral as all market particpants (such as hedge funds) when they enetered into these contracts we wouldn't see the liquidity mismatch you're talking about.<br /><br />The ability to sell CDS portection without posting collateral allowed AIG and other institutions (*cough* Berkshire *cough*) to generate infinite IRR on the assumption there was no risk of default.<br /><br />Force all particpants to post homogenous levels of collateral like the equity options market does and it will remove the problem. This is no surprise really, because the CDS market is in many ways simply a bond option market.Mugpunternoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-75731778703637501472009-04-25T01:22:00.000+10:002009-04-25T01:22:00.000+10:00solvency/liquidity tutorials to undergrads are fin...solvency/liquidity tutorials to undergrads are fine, but GE is up 100% since you made the no buy call, mr hempton.<br /><br />how much is that annualized and how do you like your crow?the big dumbnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-86727247826113358782009-04-24T21:53:00.000+10:002009-04-24T21:53:00.000+10:00"...the ability to write vast amounts of CDS witho..."...the ability to write vast amounts of CDS without needing cash was important in some parts of the crisis."<br /><br />This is NOT a problem with CDS --- it's a problem with counterparty risk management, in that firms got away with not posting collateral. That would never happen with options, FX, futures, blah...MWnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-83259714095511624652009-04-24T20:29:00.000+10:002009-04-24T20:29:00.000+10:00I did say that especially collateralised CDS were ...I did say that especially collateralised CDS were difficult.<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-12308926986019794152009-04-24T19:33:00.000+10:002009-04-24T19:33:00.000+10:00"But CDS (also unlike loans) cause a cash drain wh..."But CDS (also unlike loans) cause a cash drain when they default"<br /><br />Not just on default. A major problem is the cash drain to deal with Mr Markets increased perception of default risk in the form of collateral posting. This caused a feedback loop.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-58735263293107676972009-04-24T14:56:00.000+10:002009-04-24T14:56:00.000+10:00Was Madoff just a liquid but insolvent bank? At wh...Was Madoff just a liquid but insolvent bank? At which point does a liquid but insolvent bank become a Ponzi scheme? And finally, which is the minimum amount of document forging that will sent such a bank CFO to jail? Questions, questions.IFnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-20290242480641308502009-04-24T09:51:00.000+10:002009-04-24T09:51:00.000+10:00Thanks for giving some clarity. They don't teach ...Thanks for giving some clarity. They don't teach us this stuff as an undergrad :)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-85003194345785353882009-04-24T02:30:00.000+10:002009-04-24T02:30:00.000+10:00OTC derivative collateral requirements are a funct...OTC derivative collateral requirements are a function of the pricing of the contract and the rating of the entity -- so you can get a run on a "bank" from a rating change or from an adverse change in interest rates, if like BofA, they use interest rate derivatives extensively.<br /><br />The OTC collateral balances were at $4 trillion as of the end of the year per ISDA, up $1.9 trillion during 2008. These collateral calls on bad contracts are still the whammy that has to have the big banks concerned.<br /><br />Amazing that this hasn't really been discussed anywhere. Bloomberg refers to "soul-searching" today, but not the $1.9 trillion...MDZhttps://www.blogger.com/profile/17889237414781279558noreply@blogger.com