The finance lawyer who blogs at Economics of Contempt has a very nice summary of what is required for JP Morgan to claim that the trades at the CIO unit are allowed under the Volcker Rule because they were “portfolio hedging”. It is a more comprehensive and textual version of our requirement that JP Morgan [...]
JP Morgan’s $2 billion loss on credit derivatives traded by its Chief Investment Office (CIO) has moved the debate over implementation of the Volcker Rule to the front page. Many claim that these trades are a clear example of the type of speculative, proprietary trading banned by the Volcker Rule. JP Morgan CEO Jamie Dimon [...]
You like potato and I like potahto, You like tomato and I like tomahto, Potato, potahto, tomato, tomahto! Let’s call the whole thing off! from Let’s Call the Whole Thing Off by George & Ira Gershwin This past Tuesday was the closing date for Comment Letters to the CFTC on its proposed Volcker Rule, [...]
February 9, 2012 – 1:49 am
Credit Suisse (CS) has announced it will pay a portion of its bankers’ bonuses with a structured note instead of cash. The note pays a fixed coupon of around 6% per year, and is backed by a package of derivative contracts currently in the balance sheet of CS. Since the value of the portfolio is [...]
December 6, 2011 – 12:58 pm
Much has been said about MF Global, the US brokerage and clearing group that filed for bankruptcy in late October. In March 2010, when Jon Corzine was brought in as the CEO, MF Global’s franchise in brokerage and clearing operations was strong, but had tallied a string of losses. Corzine was tasked with cutting expenses [...]
November 29, 2011 – 5:01 pm
In the world of finance, the name Metallgesellschaft (MG) is known primarily as one of the early “derivative disaster” cases. MG was a metal, mining and engineering company, and the 14th largest corporation in Germany. At the start of 1994, the company stood on the brink of bankruptcy because of more than $1 billion in [...]
November 28, 2011 – 3:10 am
John Kay at the Financial Times has a nice column reminding us of the delusions of following a martingale betting strategy. It’s a persistent delusion that shows up in many different contexts.
October 26, 2011 – 6:12 pm
The Volcker Rule contained in the Dodd-Frank financial reform act bans banks from proprietary trading. In order to implement the Rule, it is necessary to distinguish proprietary trading activities, which are proscribed, from market-making activities and other traditional banking functions, which are allowed. Many traders at banks claim that this distinction is impossible to make [...]
September 5, 2011 – 11:01 pm
We began this series of posts recapping the finding that a currency carry trade investment has historically produced high return relative to the low risk. This finding is not consistent with models in finance that focus on the correlation between an investment’s return and the return on some benchmark stock portfolio. Using these models, and [...]
August 29, 2011 – 11:01 pm
In our previous post in this series, we highlighted a line of research by Burnside et al. that explains the profitability of the carry trade as a “peso” problem. That is, the historical data doesn’t completely reflect all of the bad outcomes that may arise. The as yet unobserved bad outcomes are known as “peso [...]
