Today is the 10th anniversary of Lloyds TSB acquiring HBOS. An awful lot has been written about this, but there has been comparatively little about why a regulatory approach that was implemented in early 2008, and which was meant to protect the bank from losing its capital with a probability of 1 in 1,000 years, failed so spectacularly only 9 months later. What went wrong?
UnBuffetted
A postbag objector objects to my post on Monday, saying that Warren Buffett explicitly disagrees with quarterly P/L swings on derivative positions, given that they are based on B-S valuations. See e.g. his 2010 newsletter p.21. Given that Buffett is taking in billions of premium without collateral, which he can then invest however he likes, why should this strategy be equivalent to taking a long position, even on no-collateral terms, when the latter would have produced nothing up front?