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The Black Swan Replies |
rffrydr
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Joined: 30 Oct 2005
Posts: 16445
Location: Sunny California
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 Posted: Tue Sep 04, 2007 4:56 am Post subject: |
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From NYT above:
| Quote: | | Go ask your portfolio manager for his definition of "risk," and odds are that he will supply you with a measure that excludes the possibility of the Black Swan-hence one that has no better predictive value for assessing the total risks than astrology |
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rffrydr
Moderator
Joined: 30 Oct 2005
Posts: 16445
Location: Sunny California
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| Posted: Tue Sep 04, 2007 4:23 am Post subject: |
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August 22nd
| Quote: | We're into Black Swan and long tail territory. Yesterday, at one point, the stampede to safety pushed down three-month Treasury rates to just below 3 per cent, compared with 5 per cent only weeks ago. In real terms the US government was able, almost, to borrow for free. Money market funds are buying indiscriminately, keen to show their customers they hold risk-free assets. Lenders are refusing to roll over commercial paper and parking their cash in Treasuries instead.
If investors are now hypersensitive to risk, the mystery is why there is not more differentiation between individual banks' borrowing costs. After all, the accepted wisdom is that a big, conservative retail bank is far less likely to fail as a result of subprime monkey-business than, say, a Wall Street firm or a state-backed European bank with their curious appetite for self-harm. Yet, according to advertised interbank market rates, all banks are equally radioactive relative to the government, with the three-month cost of borrowing dollars sitting at 5.5 per cent and no real differentiation between institutions.
The extra cash injected by central banks into the system now exceeds the likely rise in banks' aggregate capital requirement from the drying up of the commercial paper market. But it seems very likely that some banks are suffering more than others. First, both the Federal Reserve and Bank of England emergency lending windows have now been used by undisclosed institutions, in spite of their abnormal expense. Second, published interbank rates may not be a reliable guide to individual banks' actual activity. Yesterday, WestLB's advertised overnight borrowing rate for dollars in London was in line with the market in spite of its chief executive's comments that German banks could be penalised. Finally, other measures of banks' risk, such as spreads on longer-term debt, suggest differentiation. Freakishly low Treasury yields indicate that frazzled investors are drawing a line between risk-free and other assets. The more durable distinction is between healthy banks and the few whose survival hangs in the balance. |
Spread over Treasuries, aug 22:
Wachovia, BA 10bp
Merrill, Goldm 55bp
LEH 78bp
BSC 100bp
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