Comments on: Bonus culture datapoint of the day http://blogs.reuters.com/felix-salmon/2010/12/22/bonus-culture-datapoint-of-the-day/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Danny_Black http://blogs.reuters.com/felix-salmon/2010/12/22/bonus-culture-datapoint-of-the-day/comment-page-1/#comment-22801 Fri, 07 Jan 2011 16:44:23 +0000 http://blogs.reuters.com/felix-salmon/?p=6694#comment-22801 thats ok was sort of waiting for you…

Only saw a little bit about LCR in coverage of Basel 3, unlike the coverage of capital and exotic debt instruments. Haven’t read a thing about FSA – mostly because I don’t care about the UK terribly much any more and it doesn’t pop up that often in what i read.

Also the little i did read still have a built-in trigger namely the hard barrier on the credit rating of the “risk free” bonds counting towards liquidity.

Cheers anyway for the response, always worth reading!

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By: drewiepe http://blogs.reuters.com/felix-salmon/2010/12/22/bonus-culture-datapoint-of-the-day/comment-page-1/#comment-22656 Tue, 04 Jan 2011 12:06:51 +0000 http://blogs.reuters.com/felix-salmon/?p=6694#comment-22656 Moreover Danny, if you don’t mind me saying, I think this “real-time liquidity assessment” is something that is a focus for new FSA regulations, as well as Basle III.

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By: drewiepe http://blogs.reuters.com/felix-salmon/2010/12/22/bonus-culture-datapoint-of-the-day/comment-page-1/#comment-22655 Tue, 04 Jan 2011 11:03:36 +0000 http://blogs.reuters.com/felix-salmon/?p=6694#comment-22655 Apologies for not returning sooner Danny. Sorry for not being more clear. I was not really talking about the PNL arrangements but rather about the risk mitigation techniques/theories utilised. Namely allowing positions to “collapse” to zero balance sheet usage and zero risk if they were covered by the purchasal of small amounts of CDS protection.

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2010/12/22/bonus-culture-datapoint-of-the-day/comment-page-1/#comment-22488 Thu, 30 Dec 2010 10:21:34 +0000 http://blogs.reuters.com/felix-salmon/?p=6694#comment-22488 As a side note, I think that UBS report highlights some of the true issues that helped caused the crisis:

1) As I said before I find it extraordinary that VaR was used as anything more than a coarse directional heuristic. I can understand the focus from a reg arb point of view. Ditto ratings.

2) The lack of focus on the management of liquidity as a goal in itself. Capital and “profits” are opinion, cash in cash out are facts. It is something that is relatively easy to measure and harder to game on a rolling basis and a liquid bank can sit out short-term blips that a bank with lots of “capital” but no cash cannot. I also see no reason why banks should not be able to show more or less real time info on liquidity to regulators if not publicly. Much more useful CVA than say share price and tends to be more accurate a predictor of stress with less frequent and smaller jumps.

3) Feedback loops. They hedged some of the SS tranches with monolines. Prices decline, monolines have to put up more cash, they get downgraded, hedges are not properly hedged, bank sells causing prices to decline. Rinse and repeat. Same with the wholely artificial banding for credit risk, the static focus on credit risk and regulatory limits on different grades causing unnecessary discontinuous jumps.

Seems to me the last two are really key and barely covered.

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2010/12/22/bonus-culture-datapoint-of-the-day/comment-page-1/#comment-22486 Thu, 30 Dec 2010 10:02:11 +0000 http://blogs.reuters.com/felix-salmon/?p=6694#comment-22486 drewiepe, thanks for the link.

Not sure what you mean by the holdings being concealed. ML boasted about it’s warehouse and CDO positions in 2005 and 2006. What was not apparent was the risk they were taking. The desk limits were apparently VaR based without operational limits on the amount of loans taken on. I have to say I find this extraordinary given literally everyone knows the flaws in this methodology, especially for AAA rated FI instruments where the risk is all downside and discontinuous.

I would say that UBS stands to a certain extent as a counterexample to what is claimed here. UBS treasury was compensated on a stand-alone P&L basis and so was incentivised to lodge “excess cash” in higher yielding ABS. Had they had this soft P&L arrangement where they were rewarded for the liquidity they provided to the other bank units they presumably would have focus more on the liquidity than the face yield.

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By: drewiepe http://blogs.reuters.com/felix-salmon/2010/12/22/bonus-culture-datapoint-of-the-day/comment-page-1/#comment-22484 Thu, 30 Dec 2010 08:29:13 +0000 http://blogs.reuters.com/felix-salmon/?p=6694#comment-22484 I don’t know for sure, but I strongly suspect that the manner in which the scale of the holdings were concealed, and the manner by which the internal buyers were compensated, were both similar to the way in which these were perpetrated at UBS. In fact, to link this story without any reference to the EBK/UBS Shareholder report on those losses is rather remiss.

http://www.ubs.com/1/e/investors/release s?newsId=140339

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2010/12/22/bonus-culture-datapoint-of-the-day/comment-page-1/#comment-22331 Tue, 28 Dec 2010 13:43:13 +0000 http://blogs.reuters.com/felix-salmon/?p=6694#comment-22331 rankings I think is the closest. Walk round a trading floor of any bank and they will have these sort of posters – “number one BBB Vietnamese Rice-backed Bonds research analyst 1994″.

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By: TFF http://blogs.reuters.com/felix-salmon/2010/12/22/bonus-culture-datapoint-of-the-day/comment-page-1/#comment-22328 Tue, 28 Dec 2010 13:21:41 +0000 http://blogs.reuters.com/felix-salmon/?p=6694#comment-22328 Ah, I see. That might be a Brit term? Though I can’t think of an American equivalent (standings? rankings?), so I wouldn’t be surprised if it were borrowed for some purposes.

Thanks, DB.

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2010/12/22/bonus-culture-datapoint-of-the-day/comment-page-1/#comment-22323 Tue, 28 Dec 2010 12:20:14 +0000 http://blogs.reuters.com/felix-salmon/?p=6694#comment-22323 Maybe didn’t understand. League tables like “We are the number one CDO issuer”. For example, a govie market making desk might artificially compress spreads to buy business which the govie primary issuance desk then uses to get business and in return that desk shares some of its P&L with the market making desk.

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By: TFF http://blogs.reuters.com/felix-salmon/2010/12/22/bonus-culture-datapoint-of-the-day/comment-page-1/#comment-22321 Tue, 28 Dec 2010 12:16:27 +0000 http://blogs.reuters.com/felix-salmon/?p=6694#comment-22321 Danny_Black, “league tables”? “Clean tables”? Or do I not understand the term?

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