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Archive for Credit

Financial-overhaul, Bank Ratings & Scenario Analysis

Andy Spero | May 24, 2010 | 0 Comment(s) |

Have Banks or Regulators Required Such Analyses?

There’s an interesting article in today’s edition of The Wall Street Journal with the title, Overhaul Puts Bank Ratings at Risk.

The article explains how the version of the financial industry regulation bill that was passed by the Senate significantly weakens implicit government support for banks that were or may still be presumed to be “too-big-to-fail.” If that version of the bill becomes law “TBTF” will have been transformed to “NTBTF,” depending upon the whims and fears of the regime in charge… Read the rest

This Isn’t Good News for CMBS Holders and Erstwhile Pipelines

Andy Spero | August 15, 2009 | 0 Comment(s) |

We occasionally write about CMBS or Commercial Mortgage-backed Securities and the CMBX index. For example, last November, we wrote CMBS Is Like Lumpy MBS and That’s Not Good. We tend to get more hits on our tongue-in-cheek post, How to Trade CMBS? and find that a bit scary.

What should truly frighten both CMBS holders and banks with large commercial-mortgage loan portfolios more than our discussion of our page rankings is this article in Saturday’s edition of The Wall Street Journal: Hotels Deliver Some ‘Jingle Mail.’ The… Read the rest

The Banks' Mark-to-market Gains on Debt

Andy Spero | May 15, 2009 | 0 Comment(s) |

How Much Have They “Gained” From Becoming Worth Less?

Since the beginning of April, when many large banks reported unexpected (or unexpectedly large) first-quarter profits, we’ve wondered what percentage of those profits could be attributed to the accounting rule that lets them recognize a gain because their own liabilities have become worth less. (We think “worth less” is the correct form, but for the extreme cases, it should indeed be “worthless.”)

We wrote about this issue of recognizing gains from losses in mid-December in our post Read the rest

More Capital Ratio Silliness

Andy Spero | April 21, 2009 | 0 Comment(s) |

The Irrelevance of Book Equity and Capital Ratios

Last month we wrote March Madness: New Bank Capital Requirements. In that, we stated: “We’ve always thought that such requirements were stupid and provided a false sense of security: kind of like ducking and covering under one’s school desk as practice and preparation for a nuclear explosion.”

We also provided an example from an old merger of two rust belt firms. At the time of the merger, the firms had combined book… Read the rest

Calculating Counterparty Credit Reserves

Andy Spero | April 8, 2009 | 0 Comment(s) |

Implied Risk Neutral Default Rates Versus Historical Default Rates

For some problems, there is no good or true solution, but something must be done or estimated. Such is the case with calculating credit reserves because real default rates can never be known, but risk-neutral implied or historical default rates can be calculated and used, but both are flawed.

Generally, when we discuss this topic, we have reduced-form models in mind (as opposed to structural ones, but there’s no shortage of assumptions in structural models, either).

We’ve written about implied… Read the rest

And You Thought We Were Depressing

Andy Spero | April 2, 2009 | 0 Comment(s) |

Responding to our request for comments in yesterday’s post, Happy Anniversary to…Us!, a reader from Australia pointed us to an excellent and quite comprehensive article in May’s edition of The Atlantic Monthly. (Thanks Steven.)

The article is entitled “The Quiet Coup,” and was written by Simon Johnson, an econ prof at MIT and the former Chief Economist at the International Monetary Fund (IMF). Fortunately, as you can tell by the link, the article is freely available from The Atlantic‘s web site.¹

Mr.… Read the rest

Financial Reporting Transparency and Regulation

Andy Spero | March 30, 2009 | 0 Comment(s) |

There are two related essays in the editorial section of today’s (March 30) edition of The Wall Street Journal regarding government oversight and regulation that are worth mentioning: Welcome, Businessmen, to Government Oversight and Transparency Is More Powerful Than Regulation. We’ll mention the suffocating nature of regulations and then discuss the more interesting topic last, including our own work of using XML-based systems and tags for (internal) management information systems, which relates to the discussion of XBRL systems in the second column.

Suffocating Regulations and Bureaucracy

Is there any other… Read the rest

Weekend at Bernanke's

Andy Spero | January 15, 2009 | 0 Comment(s) |

We think the current government and industry strategy of attempting to prop-up the dead as a way to re-energize the party and stay alive (or relevant) is bound to fail. In reminds us of the plot from the 1989 comedy, Weekend at Bernie’s. Is TARP II nothing more than a remake of the 1993 sequel?

We read in The Wall Street Journal today that Bank of America to Get Billions in U.S. Aid, and as usual we wonder whether it is necessary.

We doubted the necessity… Read the rest

Marking Debt to "Market" or Addition Through Subtraction

Andy Spero | December 19, 2008 | 0 Comment(s) |

It Doesn’t Add Up.

According to The Wall Street Journal, today S&P Cut Ratings on 11 Banks.

Depending upon each institution’s accounting policies, individuals at those firms may have cheered their firm’s respective downgrade because that action may have reduce the value of the firm’s outstanding debt thereby allowing the firm to recognize an unrealized gain on its income statement. (Yeah, it is perverse and stupid.)

For example, by combining the contents of this article about Morgan Stanley’s fourth quarter earnings and page two of this report, it seems that Morgan… Read the rest

Multi-period Bond Price Implied Default Rates and CDS

Andy Spero | December 12, 2008 | 0 Comment(s) |

Implied Under the Assumption of Risk Neutrality

We have several posts related to the calculation of price-implied default rates under the assumption of risk neutrality and several posts related to simple CDS calculations.

Those posts have involved discrete, single-period problems, where there are only two dates of interest: today and a future date where an uncertain claim or cash flow will be realized, i.e., when bankruptcy would occur.

We’ve focused on binary models and will continue to do so here. In fact, to analyze a two-period problem, we’ll just build upon our… Read the rest

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