Author: db

Posted on

Even German regulators are useless

Source: Mercedes Benz

An excellent piece here on the uselessness of regulation generally. The Wirecard affair has brought out a rash of articles about how German regulation has failed, as though regulation in other countries might be better.

Wrong.

 If anybody can make regulation work Germans, precise, efficient, un-corrupt and indomitable can do so.So, the problem must be, not that German regulators are inept, but that regulation as a whole cannot catch fraud. As 2008 proved, it cannot catch sophisticated cutting-edge scams, either. So wouldn’t we be better off without it?

Continue reading “Even German regulators are useless”

Posted on

Wirecard illiquidity


Wirecard ticks all the Eumaeus boxes for things that went wrong for entirely predictable reasons. More on that later.

Meanwhile, the chart above shows the yield of the bond that Wirecard issued last September. Notice how it explodes a bit at the end. The Sam Woods theory is that such explosions are the effect of illiquidity.

Note the smaller blip upwards in the middle of October 2019 which happened to coincide with the FT’s revelation of internal documents from Wirecard pointing to “a concerted effort to fraudulently inflate sales and profits”.

Why would such a revelation affect the liquidity of the bond? And why would the later revelation this month that nearly €2bn had gone missing affect the liquidity so much that the bond is now only worth 20c?

Still, if Sam is right it looks a great buy. Repays in 2024 with a 99.5% probability of full repayment. Any offers?

Posted on

Louie Burns

I was very sad to learn of the death of my Leasehold Knowledge colleague Louie Burns this weekend.

Louie was one of the country’s leading campaigners against the injustices of the leasehold system.  He was, as they say, a larger than life character, and could light up any group that he joined.

I worked with him on the setting of the deferment rate, a subject on which he campaigned tirelessly. The world of leasehold will be a darker place without him, but the campaign will go on.

RIP Louie.

Posted on

Superfunds

There were a few reports out over the weekend, e.g. here, about the The Pensions Regulator’s new interim guidance on superfunds.

The sheer lack of detail here is breathtaking. No formula,  no apparent regime for internal model approval, no regulatory returns.  Of course, they will “need to be comfortable that the investment and risk models superfunds intend to use are appropriate, robust and capable of accurately measuring and monitoring risks that the scheme is exposed to”, but no further details given yet.

The requirement to demonstrate “expected returns for various asset classes, attributable to the scheme and in the capital buffer” is ominous, but what else did you expect?

 

Posted on

Regulation masking condition of insurers

Source: FT

A great piece from Ford of the FT this morning.  Insurers don’t have to mark down the virus losses on their bond portfolios on the assumption that the spreads will narrow back down again. Analysis from Dean Buckner, a former insurance regulator at the UK watchdog, has estimated that six large UK insurers collectively ran up £28bn of mark-to-market losses on their bond holdings as of the beginning of June, etc.

But the worry is that “a large number of bonds subsequently default or get downgraded to junk. That would force the insurer to crystallise a sudden and potentially much more substantial loss. ”

Quite.  The comments as always are instructive. Buckner is accused of being a ‘mark to market fundamentalist’. Correct. If you value the balance sheet above its market price, you are defrauding prospective shareholders who might want to buy. If you value the balance sheet below its market price, you are defrauding existing shareholders who might want to sell. You should not be defrauding shareholders, who bear the brunt of the risk. Therefore value the balance sheet at best estimate of its market price.

Posted on

Liquidity vs default risk

The core assumption of Matching Adjustment is that default risk changes very slowly over time, which is why the average spread over a 30 years period is one of the inputs into the Fundamental Spread (=credit risk spread) calculation. It follows that sharp movements in bond spreads cannot be the result of changes in default risk, hence cannot correspond to any change in the credit risk spread. The change must therefore be in the Matching Adjustment (=liquidity) spread.

How could we test this assumption?

Continue reading “Liquidity vs default risk”

Posted on

Definitely a cushion

More to follow but  see below for a partial transcript of the Treasury Committee hearing yesterday, with Harriett Baldwin quizzing Jon Cunliffe and others about the effect of Covid on life insurers.

Does Sir Jon agree with Sir John Vickers “when he says that, er, the Matching Adjustment is more of a  mask than a cushion“?

A lot of waffle from Sir Jon. He says that ‘market liquidity risks’ are not suffered if assets are held to maturity, which is correct, then says “if you were to price the assets that insurance companies hold on their balance sheets at market prices, you would be picking up how liquid the assets were, whether you could sell them in stress etc”,  which is clearly false, but at least confirms that he thinks it is a cushion.

Baldwin complains that she is out of time, and Stride (Chair) closes with the remark that he senses “a slight frustration there, and you might have valued a little more time to probe”

I think on that basis we might write to the panel after this session, and if we do if I can ask the members of the panel to respond very promptly to any letter we might send on the issue of insurance and stress testing.

Clearly more to follow. Stay tuned.

Continue reading “Definitely a cushion”

Posted on

Are Britain’s banks strong enough for coronavirus?

Howard Mustoe’s article on banking strength is here.  Quite long, but worth it (of course!).  It quotes Durham University Professor Kevin Dowd and former Bank of England regulator Dean Buckner saying the most appropriate capital measure is a market value one, which is based on banks’ share prices.

This is calculated by multiplying the number of shares in issue by the current share price. They prefer this measure because share prices are an up-to-date reflection of what investors think a company is worth, whereas the banks’ reported figures are not.

True, although other miserable people say to focus on book value.

Continue reading “Are Britain’s banks strong enough for coronavirus?”