On mythology: Q1 2015 review & outlook

Updated on Friday, April 10, 2015 at 07:47AM by hb

Our fundamental outlook has not changed from last quarter’s review, and we think we got the broader mechanics right. We actually suggest readers go back and read the first five paragraphs. These are long lived themes, and we’re going to be multiplying and extending some of them.

What is new, or slightly different, is that the pressures are building, some accelerating, and there seems to be increasing recognition by the markets and electorate that something is amiss.

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The Fed, collateral and repo: more systemic risk?

Updated on Saturday, July 20, 2013 at 05:13PM by hb

Updated on Monday, July 22, 2013 at 09:44PM by hb

Updated on Monday, July 22, 2013 at 10:11PM by hb

We’ve had the FT article of April 23, 2013, The Misuse of Collateral Can Help Create Systemic Risk by Satyajit Das, on our desk for several months. It is highlighted and underlined, and we borrow from it liberally here (in fair use we trust). His article was prescient.

The thesis is simple enough: in the main collateral is now the basis of our primary financial institutions, most capital markets transactions, and source of liquidity, which is to say, our entire financial system. One might infer that collateral is what you use when you have no capital. He highlights, excerpted below, some consequences, intended or not, of the increasing dependency on collateral. Translation: “you can run, but you can’t hide.”

First, it shifts the emphasis from the borrower or counterparty’s creditworthiness to the collateral. Parties normally ineligible to borrow or transact in the first place are able to enter into transactions. Rapid growth in debt levels, derivative contract volumes and the shadow banking system (hedge funds or structured investment vehicles) are dependent on the use and availability of collateral.

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Swiss reject Irish government debt as valid collateral

The Swiss National Bank (SNB) will no longer accept Irish government debt, and that of several of the country's major lenders, in its repo operations. This is a significant adverse credit judgement. We look for others to follow and ultimately other weak countries will be added to the list. Some one will have to finance this stuff... just not the Swiss.

Evidently, the Swiss do not see their primary role as protecting the Irish government or selected Irish banks from the consequences of bad policy. 

"You just made the list, buddy" -  Francis, aka Pyscho, in the movie Stripes