More on (In)efficient MarketsWhat is driving this? One bank suggests that "The relative sensitivity to ratings and downgrade risk for Triple A CLO investors may be weighing more heavily on CLO prices than rating issues at the loan level". That means that two sets of investors are taking quite different views of risk. Which is the pre-requisite for arbitrage. Some see arbitrage as the bad guy in the black hat, but the positive aspect is that it brings disconnected markets back into line.
[ add comment ] | permalink
That was a headline in a recent edition of the New York Times. The article is about very clever scientists who thought they could reduce markets to formulae, and beat the markets as a result. There were, of course, more things in heaven and earth than were dreamed of in their philosophy. I gave some views on how the Gaussian copula (bell curve) is a fundamentally flawed analysis in "The Cracked Bell Curve" http://www.robinhoodfinance.com/docs/Th ... _Curve.pdf
a year or so ago.
The most recent edition of International Financing Review has an article entitled "The Copula That Killed" which describes the work of one David Li of JP Morgan, who produced an explanation of correlation which was clear, simple... and fundamentally flawed. Mr Li must empathise with Thomas Midgley, a well-meaning scientist in the early 20th century who developed two clever solutions to industrial problems-lead tetraethyl in petrol (poisoned lots of people); and chlorofluorocarbons for refrigeration and aerosols (made big holes in the ozone layer). Wikipedia says of Midgley "While lauded at the time for his discoveries, today his legacy is seen as far more mixed considering the serious negative environmental impacts of these innovations."
[ add comment ] | permalink
That's the headline in a newsletter from Another Financial Portal, received today. Whatever can they mean?
[ add comment ] ( 104 views ) | permalink
These is an increasing trend for issuers to buy back bonds at a discount. In the banking world, Macquarie Bank is offering between 50 and 60 cents on the dollar for $340m of its own subordinated bonds.
This is a good deal for the bank-if I borrow $10 from you, and you agree to extinguish the debt if I pay you $5, I have a $5 profit/increase in capital.
In the structured world, we have recently seen Terra Firma's GRAND (another contrived acronym, don't ask) buying up its own sub notes at 30-50% of par; and Canary Wharf Finance II offering to buy various notes at between 15 and 50% of par. Some of these notes were issued only 2 years ago, in April 2007!
This is just one more sign of markets being artificially depressed by technical factors, or irrational behaviour if you prefer, and the tremendous value to be had in some (not all!) structured bonds. According to Fitch's analysis, typical UK AAA prime RMBS starts to incur losses when peak-to-trough house price declines are 60%, and defaults are 30%. And that will be on par, not the currently extremely low market prices.
[ add comment ] ( 120 views ) | permalink
...that the first securitisation deal I put together was signed. It was a £165m financing of a large “trophy” building by the Thames. There were several tenants of differing credit quality and leases of various maturities. The rights to the lease payments and the building were transferred to a Liechtenstein SPV, smoothed to even quarterly payments using swaps, and sold into the market with a 7-year maturity.
Compared to more recent times, doing this and several subsequent deals was like hacking through the jungle rather than driving down the motorway. Everything was new, and had to be worked out from first principles. This was a hard school, but extremely challenging & interesting. It certainly gives you a strong background for doing new things, or doing things in new ways, as I and colleagues still do.
[ add comment ] ( 153 views ) | permalink
Calendar
