A paper published in the Journal of Finance shows that AAA tranches were inflated 12.1% over published guidelines and that, on average, the AAA tranches analyzed were structured to BBB support levels. (JoF)
For implications of this rating inflation (by S&P), see this Bloomberg article.
See our previous coverage on CDOs here and here.
Journal of Finance,
Bloomberg has a fascinating article on the coming changes to swap collateral under the Dodd-Frank Act. (Bloomberg) I highly recommend you read this piece. Here are some key takeaways:
- Starting in March, as much as 79 percent of derivatives trades... must be backed by collateral and go through clearinghouses such as CME Group;
- Traders may have to post $927 billion;
- Currently, about 40 percent of swaps are cleared by clearinghouses;
- The collateral put up for swaps trades covered by Dodd-Frank typically equals only 0.5 percent of their notional value;
- At CME, the collateral... for a 10-year interest-rate swap ranges between 2.89 percent and 4.06 percent of the trade's notional value;
- (Collateral amounts are) based on "value-at-risk", and is calculated to cover the losses a trader might suffer with a 99 percent level of confidence. (I hope they're not still using normal distributions.);
- The Fed would backstop the clearinghouses in an emergency;
- The swaps market is 8X the futures market;
The latest liability estimate for the Libor scandal is in at $6 billion for municipal bonds, writes Darrell Preston of Bloomberg. (Bloomberg) The estimate comes from Swap Financial Group. The size of the muni swap market is estimated to be about $500 billion, so the $6 billion estimate comes in at 1.2 percent.
Swap Financial Group,
Joshua Gallu of Bloomberg reports here that many of the worlds benchmarks could be subject to the same type of manipulation seen with LIBOR. How?:
Fewer than half of the benchmark interest rates surveyed in the U.S., Europe and Asia were based on actual transactions, according to a confidential International Organization of Securities Commissions discussion paper obtained by Bloomberg News. Instead, the rates were calculated by methodologies that were unclear, not transparent and only rarely subject to specific regulatory standards or obligations, the group said.
I think most people would be shocked to discover that less than half the interest rate indexes were based on transactions. We have previously commented on this here
The press release by the industry group IOSCO can be found here.
I came across this piece from Bloomberg on the LIBOR fixing scandal. Vaughan and Linsell do a good job laying out how any participating bank could manipulate the rate by entering high or low bids.
The article can be found here. Also, a mid-length article from The Economist can be found here.
Bloomberg is hiring a Data Visualization Professional for its Charts and Graphics Business, which does all the graphical solutions for the Bloomberg Professional Terminal.
As a Data Visualization and Charting Business Manager, you will be responsible for designing visual solutions that represent significant amounts of data to communicate actionable information. You will be continually challenged to design creative solutions that help users make decisions. The design and development process will require you to collaborate with business managers, engineers and clients throughout the planning and development lifecycle.
I expect to see many more of these kinds of job listings by mainstream companies.