Posts filed under “Credit”

Moral Hazard and the LTCM Bailout

Today is an auspicious anniversary, though it’s one I suspect many people may not recall. On Sept. 23, 1998, former Federal Reserve Chairman Alan Greenspan and William McDonough, then president of the Federal Reserve Bank of New York, managed to orchestrate the rescue of the hedge fund Long Term Capital Management.

It was a strange exercise in both herding cats and moral hazard. It wasn’t a government bailout, since no taxpayer money was involved. More than a dozen Wall Street banks, many of which had exposure to LTCM, ponied up $3.65 billion to unwind the fund’s complex leveraged bets.

Still, the lesson learned was that in the event of troubles, the Fed could be counted on to lend a hand to a) avoid disruption; b) add liquidity and; c) protect the Street against catastrophic losses. In hindsight, it looks like the lessons learned were the wrong ones.

Recall the summer of 1998 when Russia — a hot investment for bond underwriters — defaulted on its ruble-denominated debt. This triggered a chain reaction of losses for anyone who either held Russian debt or had assets denominated in rubles.

The biggest of those suffering losses was the wildly overleveraged giant hedge fund. Continues here

 

Category: Credit, Hedge Funds, Really, really bad calls

A World of Sovereign Risk

Interesting interactive graphic from Blackrock:


Source: BlackRock

 

Read More

Category: Credit, Data Analysis, Economy, Fixed Income/Interest Rates

John Oliver: Student Debt

John Oliver discusses student debt, which is awful, as well as for-profit colleges, who are awfully good at inflicting debt upon us.

Category: Credit, Video

Peer-to-Peer Lending Is Poised to Grow

Peer-to-Peer Lending Is Poised to Grow Yuliya Demyanyk and Daniel Kolliner     Peer-to-peer lending—a type of lending which matches individual borrowers with investors—is a recent innovation. But because it fills at least two gaps left by traditional lending sources, the peer-to-peer-lending market is likely to continue growing for some time. Emerging first in the…Read More

Category: Credit, Think Tank

Category: Credit, Fixed Income/Interest Rates, Think Tank

Banks, Shadow Banking, and Fragility

Category: Credit, Federal Reserve, Think Tank

Student Loans Are Going to Crush the Economy! (No, they are not)

  Student loans are the next great subprime crisis! At least that’s what the usual purveyors of doom and gloom say (see this, this and this). The numbers are big, the default rates are high and soon enough this is going to tip the economy into the next crisis or recession. Not so fast, writes…Read More

Category: Credit, Really, really bad calls

Gates, Fees, and Preemptive Runs

Gates, Fees, and Preemptive Runs Marco Cipriani, Antoine Martin, Patrick McCabe, and Bruno M. Parigi Liberty Street Economics, August 18, 2014       In the academic literature on banks, “suspension of convertibility”—that is, preventing the exchange of deposits at par for cash—has traditionally been seen as a potential means of preventing economically damaging bank…Read More

Category: Credit, Think Tank

One Cheer for Fair Isaac

Sometimes we don’t know exactly how broken things are until after they get fixed. Case in point: Fair Isaac Corp., the company that created the model used to calculate the scores underlying millions of consumer loan and credit decisions. The New York Times described Fair Isaac’s formula as “one of the most widely used and…Read More

Category: Credit, Economy, Really, really bad calls

Tapering Is Now Tightening

Tapering Is Now Tightening David R. Kotok July 19, 2014     For a long time, as we saw it, tapering and the threat of tapering (as in last year’s taper tantrum) did not constitute tightening. Today we explore why we believe the situation has now changed. In order to understand why tapering was not…Read More

Category: Bailouts, Credit, Federal Reserve, Fixed Income/Interest Rates, Think Tank