Non-Lessons of the Financial Crisis

As the fifth anniversary of the Lehman bankruptcy approaches, the Internet is filling up with reflections on the financial crisis and the ensuing years. My main feeling, as expressed in my latest Atlantic column, is amazement at how little we seem to have learned. Looking back, the period in late 2008 and early 2009, when it was obvious […]

Margin Requirements for OTC Derivatives: Regulators Listen, but Do They Hear?

Introduction On 2 September 2013, the Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”) published their long-awaited final policy document dealing with “Margin requirements for non-centrally cleared derivatives”. Scope Subject to certain exemptions discussed below, the final rules apply to financial firms and systemically important non-financial entities (“Covered Entities”) […]

August ETF Themes

A survey of recent industry reports highlights a few investment themes as reflected in ETF flows in August. According to Blackrock figures, a record of $15 bln left ETFs globally in August. About a third was accounted for by bond funds, though the story get complicated as one drills down. As it turns out, Blackrock’s […]

A Primer On Defining Indexing Methodologies

Indexing used to be simple. In the old days, a representative sample of securities was rolled into a portfolio, weighted by the respective market values, and left to drift with the market’s tide. This methodology—market cap indexing—is still used, of course. In fact, most of the planet’s assets linked to indexing reside under this conceptual […]

Fannie and Freddie: My Most Libertarian Post Ever

(Yes, I know that isn’t saying much.)

Most people think that Fannie Mae and Freddie Mac had something to do with the financial crisis. Some people think that they were the major reason the crisis happened, which (to them) proves that activist government policy was the cause of the crisis. Other people, including me, think they were a modest contributing factor because they did buy a lot of securities that were backed by subprime loans, but they were well behind the curve when it came to mortgage “innovation” and the creation of toxic assets. But that’s not the question here.

Pending Massachusetts Supreme Court Ruling May Invalidate Securitization Mortgage Transfers

Bloomberg has a bombshell today, that a case before the Massachusetts Supreme Court may invalidate certain types of mortgage transfers, a central process in mortgage securitizations. A ruling for the plaintiffs would render some past foreclosures invalid, raising the possibility that the borrowers could sue for damages. It would also have far reaching implications, since it would also be a significant setback to the argument made by the American Securitization Forum and the major securitization law firms who have issued opinion letters in support of securitization industry procedures.

JP Morgan Markets Its Latest Doomsday Machine (or Why Repo May Blow Up the Financial System Again)

Readers of ECONned will be very familiar with the name of Gary Gorton, author of ‘Slapped in The Face by the Invisible Hand’, which explores the relation of the so-called shadow banking system to the financial crisis. His work is pretty fundamental to understanding some of the mechanisms which made the crisis so acute. Now he’s done an interview, which I would like to have a growl at; but first, he has some basic points about shadow banking, useful later in this rather long post. Gorton explains repo thus:

You take your $200 million to the bank, to Lehman Brothers, say. You deposit it, so to speak, overnight so you can have access to it the next morning if you want to. They pay you 3 percent. And you want it to be safe, so they give you a bond as collateral. But Lehman earns the interest on the bond, say, 6 percent.

Were the Ratings Agencies Duped Rather than Dumb?

The line of thinking that underlies an investigation by New York attorney general Andrew Cuomo is a challenge to conventional wisdom about the financial crisis. The prevailing view is that since credit ratings were one of the single biggest points of failure in the crisis, the ratings agencies were one of the biggest, if not the biggest, perp.

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