John At The Center

Yves… the biggest difference is that a securitization is a static pool whereas an SIV is actively managed. That brings advantages and disadvantages. The advantages include the savings on cost (i.e., only one structure has to be set up and then can be used to cycle the arb continuously) and the ability to, like you point out, make a play on the yield curve (i.e., the SIV funds its long term assets with short term liabilities). The main disadvantage is the duration mismatch and in times of stress the inability to roll the liabilities at some rate less than that paid by the assets. In many ways, an SIV works very much like a bank… but as you say it is off balance sheet. Where your understanding I think misses the point is in your concept of leverage. The aggressive structure in Europe were levered closer to 25:1 or 30:1… hence the reasons banks like Citi moved into the market. This concept of ultra high leverage was supported structurally in that SIVs were typically only allowed to invest in AAA-rated, <2 yr WAL, floating rate securitized assets. Unfortunately, once the bid for these assets dropped below par on true credit concerns the game was up.

via naked capitalism: Some Open Questions on Structured Investment Vehicles.

SkyGrid, the nifty, free financial news aggregator, is now publishing a stream of news on Twitter, letting users follow breaking business news headlines via the microblogging network.

via SkyGrid Links Its Financial Firehose To Twitter.

The hawks, she notes, worry that the Fed has pumped too much money into the economy and won’t be able to withdraw it in time to forestall inflation. She says the Fed has the tools it needs to withdraw the money when needed – it can sell the mortgage and Treasury bonds it has accumulated if needed and some of its emergency programs are already tapering off.

Another risk she tries to shoot down is a replay of the 1970s. Back then, the Fed thought that high unemployment meant the economy was burdened with lots of slack that would keep inflation under control. It responded with low interest rates. It turned out there wasn’t as much slack as thought (the nation’s productivity was falling rapidly) and the low rates indeed fed inflation. This time, Ms. Yellen says, the slack is for real. “We are far from the kinds of unemployment rates that would make inflation a danger,” she said.

via Yellen Takes a Big Swing at Inflation Hawks – Real Time Economics – WSJ.

“Is FICO an accurate predictor of risk?” said Evan Hendricks, publisher of “Privacy Times,” a Washington-based newsletter and author of “Credit Scores & Credit Reports.” “It’s the worst system around, except for all the rest,” said Hendricks, taking a line from former U.K. Prime Minister Winston Churchill.

via FICO Scores Show Flaws as U.S. Banks Cut Credit Lines (Update1) – Bloomberg.com.

In that sort of environment correlations are, and should be, an afterthought.  As we exited that time of extreme fear we should see a bounce back in the prices of risky assets.  So the high correlations we are seeing are a natural result of the steep fall and equally steep ascent in investor sentiment and market prices.

Do correlations matter when the world is on fire? Abnormal Returns.

Guillermo Calvo and Rudy Loo-Kung argue that the benefits of bubbles almost always outweigh their costs (and thus there’s no need for regulation to prevent them).

via Economist’s View: Should We Pop Bubbles?.

“I told him that I was in the right place at the right time, because Wall Street was growing and changing so fast,” McDermott says. “My son asked what that industry is now, and I said that, were I his age, I’d think about cleantech, because there is a real societal move toward sustainable living, and there are lots of new companies forming that will eventually consolidate. Plus, Dylan loves science. Then I stepped back and wondered why I wasn’t applying that same advice to myself.”

via peHUB » Cleantech Investment Bank Launches, Complete with PE Practice.

Endowment datapoint of the day

Big university endowments like to think that their returns constitute alpha — a simple outperformance of the market. But it looks increasingly as though in fact there’s a large component of beta — outperforming when the market goes up and underperforming when it goes down.

David Swensen, Yale’s chief investment officer, said: “The important thing is to stay in the trade. Those who stayed in caught the bounce, especially in emerging markets. Others like Harvard, I think, started selling like crazy.”

He said matters were made worse by a badly-timed bet on interest rates – which collapsed after Lehman – and the decision to cut risk insurance that had been put in place by Meyer’s successor, Mohamed El-Erian, now co-chief executive of the bond giant Pimco.

Harvard would not comment on investment strategy, but Harvard watchers on Wall Street said El-Erian’s insurance had allowed the endowment to ride out some of the turbulence before Lehman’s collapse. As the crisis worsened, HMC had lost its cushion and its nerve. “If you are down 20% or 30%, the human reaction is to sell when really you should be buying,” said one fund manager.

via What they don’t teach about cash at Harvard – Times Online.

I believe that Teddy Roosevelt’s war on the trusts was an effort to reinforce the new system, not weaken it. This should be the purpose of regulation in a more and more complicated world.

The idea of an “ownership society” is an idea which is consistent with the objectives of American capitalism. But it is not credible within the context of fiscal policies that increase our external indebtedness every day to the detriment of our national wealth.

via Op-Ed Contributor – Saving American Capitalism – NYTimes.com.