The Fed softened its stress tests, which freed up bank capital, then came the Basel Endgame which would eat it all up again. Now, with the Endgame in doubt, JP Morgan has deployed its excess capital in trading bets

Leviathans of the S&P 500

7 June 2024Stocksartificial intelligence, equity indices, S&P 500, technologyNick Dunbar

The top-heaviness of the S&P 500 index has a quality all of its own, with tech companies rivalling nation states

Private credit helps drives surge in bank securitisation exposures

23 May 2024BanksCLOs, collateralised loan obligations, leveraged loans, private credit, securitisationNick Dunbar

Banks are originating, sponsoring and investing in CLOs are an accelerating pace

The Unaccountability Machine

17 May 2024Book Reviewscybernetics, economics, information theory, managementNick Dunbar

Could a forgotten management theory from the 1970s solve today’s economic malaise? A review of the book by Dan Davies

How CoCo bonds became indispensable for banks

9 May 2024BanksAT1, bank capital, Basel rules, CoCo bonds, corporate bonds, Credit SuisseNick Dunbar

A year on from Credit Suisse, AT1 securities remain an essential part of bank Tier 1 capital, as our corporate bond tool preview shows

The rise of the leveraged brokers

24 April 2024Insurancehigh yield bonds, insurance brokers, M&A, mergers & acquisitionsNick Dunbar

Private equity has come to dominate capital markets by means of debt-fuelled acquisitions. As a case study, we explore junk-rated insurance brokers using the Risky Finance corporate bond tool

UK motor finance scandal reawakens ghost of PPI

11 April 2024BanksBarclays, Lloyds Banking Group, mis-selling, motor finance, NatWest Group, operational riskNick Dunbar

Our banking tool shows how payment protection insurance was a ‘slow burn’ op risk event that eventually cost UK banks $60bn. Could something similar happen with motor finance?

Smoke, mirrors and net interest margins

2 April 2024BanksAccounting, Barclays, derivatives, hedging, HSBCNick Dunbar

UK banks use accounting tricks and derivatives to boost their net interest margins, and HSBC is under pressure to follow suit.

The self-fulfilling prophecy of public sector pensions

22 March 2024Pensions, Risk Commentaryeducation, pensions, public policy, schoolsNick Dunbar

How costly are unfunded public sector defined benefit pensions? The question looms large in the economic future of the UK.

HSBC’s overvalued Chinese bank

12 March 2024BanksAccounting, China, HSBCNick Dunbar

Experts say HSBC’s BoCom stake is overvalued by $12 bn. Risky Finance trawled through ten years of data to understand the giant’s accounting controversy.

Cargo ships on fire off the shoulder of Africa

26 February 2024EconomicsInternational Monetary Fund, sovereign debtNick Dunbar

A new visualisation of IMF lending this century tracks geopolitical trends and allows the effectiveness of IMF support to be assessed.

Market RWAs, trading revenues and the Basel Endgame proposal

26 January 2024Banksbank capital, Basel rules, Federal Reserve, tradingNick Dunbar

Banks complain that customers will lose access to capital markets products, but the Fed isn’t buying their argument. Use Risky Finance data to assess the debate between the Fed and the banks.

Sovereign debt bar chart race

19 January 2024EconomicsNick Dunbar

How the 20 largest sovereign bond issuers have changed over time

How averaging will solve Wall Street’s repo window dressing problem

17 January 2024BanksFederal Reserve, repo lendingNick Dunbar

The Federal Reserve’s Basel Endgame is about to solve an age-old problem: How big is a bank’s balance sheet? Right now, it depends when you look

Corporate debt bar chart race

29 December 2023Creditcorporate bondsNick Dunbar

How have the world’s biggest corporate borrowers changed since 2016?

Bank hedging throws spanner into ECB monetary policy

19 December 2023EconomicsBNP Paribas, European Central Bank, interest rate swaps, quantitative easing, Societe GeneraleNick Dunbar

Bank hedging strategies and the European Central Bank’s reversal of pandemic-era subsidised bank loans showed that quantitative tightening is not just about selling bond holdings.

It was great apart from all the death

19 December 2023Book ReviewsCovid-19, personal financeNick Dunbar

Felix Salmon recasts the Covid pandemic as an economic drama of risk preferences and micro-interactions.

The zero interest deposit lifeline

30 November 2023Banksdeposits, Federal Deposit Insurance CorporationNick Dunbar

How zero interest-bearing deposits are protecting Bank of America from its underwater securities portfolio

Crunch time for LOBO derivatives

13 November 2023Municipal Finance, Risk CommentaryBarclays, interest rate swaps, interest rates, LOBOs, options, RBSNick Dunbar

UK interest rates have risen so much, that obscure options buried in local authority loan contracts are about to be triggered for the first time

Money funds ride the QT wave

19 October 2023Funds, Risk Commentarycash, deposits, Federal Reserve, government bonds, money market fundsNick Dunbar

The seven biggest money market funds used the Fed’s overnight repo facility to help boost their assets by 50% in just 18 months, while bank deposits have plunged. Now, with quantitative tightening, their strategy is changing.

Much ado about FX swaps

4 October 2023Bankscurrency hedging, foreign exchange, FX, FX swaps, repo lendingNick Dunbar

FX swaps may be the fastest growing derivative contract, but they are not the systemic risk the Bank for International Settlements thinks they are

The Fed’s Basel Endgame and the lazy supervisor problem

12 September 2023BanksBasel III, Federal Reserve, internal models, regulation, Silicon Valley BankNick Dunbar

The Federal Reserve is proposing to end its long flirtation with Basel internal models, and now is ousting the lead supervisor of Silicon Valley Bank. The actions are two sides of the same coin.

Equity financing risks glossed over by Credit Suisse fines

29 August 2023Banksequity derivatives, equity financing, hedge fundsNick Dunbar

At first glance, the $388m of fines imposed last month on Credit Suisse (via its new owner UBS) ought to draw a line under the Archegos scandal. But providing equity financing to hedge fund and family office clients is a lucrative business for large banks which involves systemic risk.

Charting China’s real estate bond meltdown

29 August 2023Credit, Risk CommentaryChina, corporate bonds, distressed debt, real estateNick Dunbar

Our corporate bond tool shows that dollar-denominated Chinese real estate bonds are collectively worth just 12% of their total value two years ago. By analysing iBoxx departures and distressed prices, we firm up this analysis and look at the wider implications for China’s troubled economy.

The mountain range and the heat bath

14 July 2023Book ReviewsAI, artificial intelligenceNick Dunbar

Is there another book left to be written about AI? The second of a two-part series.

The last rites of BP’s pension fund

14 July 2023Articles, Pensions, Risk Commentaryinterest rates, pensions, taxationNick Dunbar

BP’s pension scheme was once a leading stakeholder in UK companies, but now it’s been ‘de-risked’ and may soon be hived off to an insurer. The story encapsulates the slow decline of Britain’s private sector defined benefit pension system.

Mechanical desires – some published and unpublished books on AI

30 June 2023Book ReviewsNick Dunbar

How do recent books help us understand the boom in artificial intelligence, and what is left to be written?

Conditioning and the Bank of England’s credibility problem

30 June 2023EconomicsBank of England, central banking, Federal Reserve, inflation, interest rate swapsNick Dunbar

The Bank of England uses forward rates derived from the swap market to forecast future base rates. This approach is flawed, and has contributed to the Bank’s loss of credibility in the fight against inflation.

Inflation and the return of corporate borrowing

8 June 2023Credithealthcare, inflation, utilitiesNick Dunbar

High interest rates were a dampener on corporate borrowing but now the trend has reversed, led by two sectors with their own inflationary characteristics

Rigged: The Incredible True Story of the Whistleblowers Jailed after Exposing the Rotten Heart of the Financial System

8 June 2023Book Reviewsinterest rate benchmarks, LIBORRobert Carver

Were prosecutions of bankers for LIBOR rigging an injustice? This is the argument of a new book, reviewed by Rob Carver

JP Morgan swallows First Republic Bank

5 May 2023BanksAccounting, bank resolution, Federal Deposit Insurance Corporation, Federal Reserve, interest rates, JP MorganNick Dunbar

Six months ago we warned about held-to-maturity bond losses at US banks, but now the giants that hedged the risk are hoovering up depositors while unhedged regional banks are in crisis

How generative AI made Nvidia a giant of the S&P 500

5 May 2023Risk Commentary, TechnologyAI, artificial intelligence, equities, Google, Microsoft, Nvidia, OpenAI, semiconductorsNick Dunbar

11 years ago, Geoff Hinton and two grad students used a pair of GPU chips to win an image classification contest. Now these chips are powering the generative AI boom and have doubled Nvidia’s market cap.

ARM and the UK stock market’s addiction to foreign capital

6 February 2023Stocks, TechnologyARM Holdings, equities, regulation, semiconductorsNick Dunbar

The UK government is desperate for Softbank-owned ARM Holdings to have a UK listing. But reversing the long-term trend toward foreign ownership of UK assets requires a rethink of the regulatory and tax obstacles to UK share ownership

Spares and heirs in the capital markets

18 January 2023Creditcorporate bondsNick Dunbar

At first sight, corporate bonds did badly in 2022, but aside from a handful of exceptions, this was the result of the sell-off in government debt, our analysis shows. With yields of 4-5%, investment grade bonds are now an attractive asset class.

Banks can’t hide from the pain of underwater bond investments

29 November 2022Banks, Risk CommentaryAccounting, government bonds, interest rate risk, investments, mortgage-backed securitiesNick Dunbar

The biggest US banks amassed $2.2 trillion of government and mortgage bond investments, but now the portfolios are underwater and banks must hold them to avoid recording losses. This will have a lasting effect on deposits and the impact of Fed policy.

The endgame of Chinese real estate bonds

15 November 2022CreditNick Dunbar

China’s real estate developers are frozen out of the bond markets, with steep losses priced in for bonds that haven’t yet defaulted. A sketchy regulatory rescue plan is likely to be too little, too late to make a difference.

When linkers bite back

21 October 2022Economics, Risk Commentaryforecasting, inflation, inflation-linked bonds, national accountsNick Dunbar

Inflation-linked bonds are proving costly to governments that issued them, and in the case of the UK, markets imply the pain will last for years to come.

Gilt trip

29 September 2022Economicsgilts, pension funds, sovereign debt, United KingdomNick Dunbar

How a populist fiscal experiment brought market mayhem and ended bond investors’ patience – at the worst possible time

Microprediction: Building an Open AI Network

22 September 2022Book ReviewsAI, predictionRobert Carver

Open source prediction networks offer cheap AI forecasting outside the control of tech giants. But lack of infrastructure means the vision has yet to be realised, writes Rob Carver.

An introduction to the Risky Finance currency tool

7 September 2022EconomicsNick Dunbar

We use statistical tools to analyse how 38 currencies performed against the US dollar

The strong dollar investment puzzle

7 September 2022Stockscurrencies, FXNick Dunbar

Now that the dollar has reached 30-40 year highs against major currencies, how should non-US investors think about US stocks? We’ve built some new visualisation tools to help analyse the problem.

Descending the debt mountain

17 June 2022Creditcorporate bonds, inflationNick Dunbar

Inflation-busting is likely to involve a recession, and companies are starting to reduce debt built up during the pandemic. What’s the best way to do it?

Regulators zero in on commodities

30 May 2022Bankscommodity risk, Federal Reserve, JP Morgan, nickelNick Dunbar

Bank exposures to commodities have reached record highs and in the wake of the nickel market turmoil in March, the Fed is warning about financial stability implications

Cash positioning for an upwards rate shock

3 May 2022Fundscash, Federal Reserve, inflation, money market funds, repo lendingNick Dunbar

While the Federal Reserve anticipates 2-3% interest rates will be enough to combat inflation, the choice of cash holdings for financial institutions provides a clue to their confidence in the Fed’s strategy. The evidence shows that they expect a bumpy ride.

Inflation and the corporate debt hangover

25 March 2022Creditcorporate bonds, inflationNick Dunbar

Inflation is supposed to be good for corporate bond issuers, because the real value of repayments is eroded. But what if a company’s ability to repay debt from earnings is eroded even faster?

The war and the pandemic

7 March 2022StocksCovid-19, equities, UkraineNick Dunbar

As war unfolds in Ukraine, equity markets are reflecting the abrupt change from pandemic to war.

Barclays and the question of reliance

25 February 2022Municipal FinanceBarclays, litigation, LOBOs, Newham councilNick Dunbar

An eve-of-trial settlement between Newham Council and Barclays brings a decade-long saga to an end but leaves open a key question in UK law.

Taperchase

9 December 2021Articles, Economicsinflation, quantitative easingNick Dunbar

What happens when inflation and quantitative easing collide? Despite the taper talk, QE isn’t going away soon.

Viruses: Agents of Evolutionary Invention

2 November 2021Book Reviewsbiology, Covid-19, evolution, medicineNick Dunbar

Dozens of books have already been published on the pandemic, and many are already out of date. To appreciate Covid, it’s best to step back and read this account of viruses published four years ago.

Tales from the junk bond boom

12 October 2021Credithigh yield bondsNick Dunbar

One in two corporate bonds issued this year have been high yield, after redemptions are taken into account. Who are the winners and losers so far?

Building on sand

15 September 2021Credit, EconomicsChina, corporate bonds, regulationNick Dunbar

Distress is building in corners of the Chinese offshore corporate bond market. What does this tell us about the nation’s relationship with foreign capital and investment?

Archegos, deleveraging and the instant bear market

12 August 2021Fundscounterparty credit risk, equities, hedge fundsNick Dunbar

Using Credit Suisse’s Archegos report, we explore how without any fundamental change in corporate earnings or economic sentiment, deleveraging mechanisms can produce an ‘instant bear market’

Commodity bets return at large banks

1 July 2021Bankscommodity risk, ESG, green finance, regulationNick Dunbar

Carmakers and other industries need good risk management as they pivot toward climate-friendly products. This has prompted banks to return to taking outsized commodity bets, which in the past have caused trading losses and compliance disasters for many institutions.

A servant of two masters

17 June 2021Bankscentral banks, corporate bonds, leverage ratios, SLR, TLACNick Dunbar

Caught between a wall of QE cash and a web of capital rules, what is left for bank CEOs to do? The evidence from securities holdings, bond issuance and TLAC.

The $3 trillion hidden exposure behind the Archegos blowup

30 April 2021Banksequity financing, hedge funds, prime brokerage, repo lendingNick Dunbar

How the push for growth turned equity financing into a hotbed of regulatory arbitrage

Facing up to JP Morgan’s leverage relief threats

18 March 2021BanksBank of America, Covid-19, Federal Reserve, JP Morgan, leverage ratios, regulationNick Dunbar

The banking giant warned that it might slash its vast balance sheet if the Fed doesn’t roll over temporary leverage ratio relief. Could it unleash a wave of turmoil in wholesale markets if it doesn’t get what it wants?

Which councils will go bust next?

25 February 2021Municipal Financeliquidity, LOBOs, local governmentNick Dunbar

UK councils are at the front line of the pandemic, but financial mismanagement is adding to their woes. Risky Finance has compiled a list of English authorities mostly likely to be on the receiving end of a government bailout.

Italian derivatives opera

10 February 2021Articlesinterest rate swaps, litigation, sovereign debt, swaptionsNick Dunbar

Italian courts are prosecuting former officials involved in derivatives terminated by Morgan Stanley nine years ago. But the US bank actually did Italy a favour, unlike the country’s other sovereign counterparties.

Making debt disappear

20 January 2021EconomicsCovid-19, modern monetary theory, quantitative easingNick Dunbar

Developed nations face ballooning post-pandemic debt burdens. In a QE world, does that actually matter?

How my ancestors helped me through the pandemic

5 January 2021Book ReviewsCovid-19, medicine, pandemicsNick Dunbar

The experience of a doctor who fought pandemics a century and a half ago provides some hope for today

Revenge of the minnows

24 November 2020StocksNick Dunbar

Rampant gigantism in the stock market took a blow recently as small-cap stocks enjoyed a run of outperformance. Is this the return of value?

How Covid forbearance gave banks a three trillion dollar boost

3 November 2020BanksBasel rules, CECL, Covid-19, Dodd-Frank Act, investment banking, tradingNick Dunbar

To keep banks operating smoothly during the pandemic, regulators eased capital requirements and boosted trading profits by underpinning financial markets. Did they go too far?

Playing chicken in the high yield market

19 October 2020Creditbankruptcy, corporate bonds, high yield bonds, restructuringNick Dunbar

In 2020, junk bondholders have to choose between painful restructuring and pushing for a repayment that might kill a company

How Covid-19 sent a shiver through bank balance sheets

28 May 2020Bankscounterparty credit risk, credit valuation adjustment, Federal Reserve, mortgage-backed securities, quantitative easing, stress VaR, Value-at-riskNick Dunbar

In value-at-risk models, counterparty exposure and securities holdings, the impact of the pandemic appears across bank balance sheets

The adventures of CECL in banking land

27 May 2020BanksAccounting, CECL, corporate loans, IFRS 9, loan loss provisions, retail loansNick Dunbar

Should accounting be independent of bank supervision? The arrival of IFRS 9 provisioning at the height of the Covid-19 crisis has exposed a three way tussle between auditors, regulators and bank management.

Visualising China’s emerging market lending splurge

16 April 2020EconomicsChina, Covid-19, government bondsNick Dunbar

Emerging market nations may struggle to repay debt in the wake of the coronavirus pandemic. And for many the biggest lender is China, as a new visualisation shows.

The corporate bond market on 18 March 2020

20 March 2020CreditCovid-19Nick Dunbar

An interactive visualisation of $12 trillion of corporate bonds showing the impact of the Covid-19 pandemic. Free to registered users.

How Covid-19 infected the corporate bond market

20 March 2020Creditairlines, central banks, coronavirus, Covid-19, high yield bondsNick Dunbar

The coronavirus outbreak has infected the corporate bond market as economies grind to a halt. Can trillions of emergency central bank measures keep borrowers alive?

US banks face yield curve stress test

9 March 2020BanksBank of America, Goldman Sachs, interest rates, JP Morgan, mortgage-backed securitiesNick Dunbar

The Covid-19 pandemic is driving bond yields to record lows. Meanwhile, the exposure of large US banks to falling rates has been amplified by regulatory changes and ballooning securities portfolios.

The Rise of Carry

9 February 2020Book ReviewstradingRobert Carver

Rob Carver reviews ‘The Rise of Carry’ by Coldiron, Lee and Lee

Argentina’s local debt puzzle

28 January 2020Economics, Municipal FinanceArgentina, Emerging markets, sub-sovereignsNick Dunbar

Sub-sovereign or regional debt is normally viewed as riskier than the sovereign. But default-prone Argentina has pushed this thesis to breaking point.

Risky Finance – review of the decade

31 December 2019ArticlesDevil's DerivativesNick Dunbar

A review of the top ten articles published in the last ten years

Goldman deploys slimmed-down model in retail push

17 December 2019BanksApple Inc, Basel rules, Goldman Sachs, qualifying revolving exposures, retail loansNick Dunbar

Goldman Sachs is venturing into consumer lending, with the help of Apple Card. Part of the strategy involves dramatic changes to the bank’s risk models

How JP Morgan broke the repo market

17 December 2019BanksFederal Reserve, JP Morgan, money market funds, repo lendingNick Dunbar

The Fed relied on JP Morgan to lend out cash into the repo market. But that was before the too-big-to-fail giant made a pivot out of cash into securities.

Giants of the S&P500 and the inequality backlash

20 November 2019Stocksinequality, wealthNick Dunbar

The S&P 500 index added $5 trillion of market cap this year, led by its biggest members. The trend is accelerating wealth inequality.

Labour’s local debt penalty

12 November 2019Municipal Financeinvestments, LOBOs, local governmentNick Dunbar

The UK’s political divisions are mirrored in the debt exposures of local authorities. Central government action may be increasing the divide.

Corporate bonds dance to the central banks’ tune

9 October 2019Economicscorporate bonds, quantitative easingNick Dunbar

This year’s reversal in central bank sentiment has swept through the corporate bond market

BNP Paribas piles on the senior tranches

8 October 2019BanksCLOs, credit ratings, securitisationNick Dunbar

The French banking giant more than doubled its securitisation exposure in the past 12 months, filings show. Does the ballooning CLO portfolio pose a risk?

Europe’s negative yield explosion

18 July 2019EconomicsECB, quantitative easingNick Dunbar

Amounts of negative-yielding euro debt have surged to record levels in anticipation of further easing. But how effective is the ECB’s strategy?

The year that transformed Britain’s LOBO landscape

12 July 2019Municipal FinanceLOBOs, Newham council, RBSNick Dunbar

Gauging the significance of the LOBO redemption wave

The Sharpe Ratio Ratio

1 July 2019Research & presentationsinvesting, quantitative analysisNick Dunbar

Portfolio optimisers often give results that are extreme and unstable. With so many variables involved, it can be hard to decipher why. This article presents a simplified formula for a two-asset optimisation which will bolster your intuitive understanding of how a portfolio optimiser behaves and why it may behave badly. Download the paper here About…

Smart Beta and Dumb Optimisation

28 June 2019FundsNick Dunbar

Portfolio optimisation has transformed investing in recent decades. But according to a new paper, naive application of such modelling can lead to extreme or unstable trading strategies.

Inside China’s real estate bond boom

21 June 2019ArticlesNick Dunbar

As trade tensions worsen, dollar-denominated bond issuance by Chinese real estate companies is at a record high, while credit spreads have tightened.

Leveraging the Powell put in US M&A markets

21 June 2019StocksNick Dunbar

With a softening approach from central banks, borrowing-driven M&A is being rewarded

What happened in bank risk last year?

29 March 2019BanksNick Dunbar

Dismantling Deutsche Bank, JP Morgan’s Steinhoff fallout and the return of securitisation

Handicapping Goldman’s 1MDB liabilities

30 January 2019BanksGoldman Sachs, operational riskNick Dunbar

The 1MDB scandal may result in a record legal settlement for Goldman Sachs. Risky Finance visualises the expected loss and explores how life-changing it might be for Goldman.

Where would the market be without share buybacks?

4 January 2019Articlesequities, S&P 500Nick Dunbar

The decline in equity markets seen in the last few months would have been worse without the countervailing effect of buybacks. But by how much?

Is size becoming a risk for S&P 500 stocks?

29 November 2018ArticlesS&P 500Nick Dunbar

The recent correction in S&P 500 stocks saw a reversal in the big-is-good trend and favoured some unfashionable sectors

Collins wedge pushes internal credit models towards irrelevance

2 November 2018BanksBasel rules, Dodd-Frank Act, Federal Reserve, JP Morgan, PNC Financial, Wells FargoNick Dunbar

The Collins amendment has become a binding capital constraint for the biggest US banks. Does this support the Fed’s argument for rolling back the advanced approaches provisions of Dodd-Frank?

The Book of Why

14 October 2018Book Reviewsartificial intelligence, Bayesian probability, scienceNick Dunbar

Judea Pearl’s causal modelling and a critique of AI

Year of the MAGA stock

11 September 2018Stockscompetition, research & development, technology, volatilityNick Dunbar

Just four S&P 500 companies gained $1 trillion of market cap this year. Was this prophesised by a trio of academics?

Looking in SEC disclosures for the next LTCM

15 August 2018Articles, Fundsfinancial reporting, hedge funds, leverage, LTCM, SECNick Dunbar

The SEC is cracking down on hedge funds that fail to provide Form PF disclosures. Risky Finance has turned the published statistics into a visualisation tool and asks whether a new LTCM could be lurking in the data.

Turkey’s crisis in six charts

15 August 2018Articles, EconomicsEmerging markets, TurkeyNick Dunbar

Turkey faces an economic crisis as its dispute with the US escalates. We highlight Turkey’s financial vulnerabilities with six charts.

How Goldman punished its FICC failures

1 August 2018Banksbonuses, Goldman Sachs, remuneration, tradingNick Dunbar

As David Solomon replaces Lloyd Blankfein, Goldman Sachs is rejigging its trading business in the wake of lacklustre results. Our new remuneration tool shows how the bank punished underperforming staff last year.

Advances in Financial Machine Learning

1 August 2018Book ReviewsRobert Carver

Robert Carver reviews ‘Advances in Financial Machine Learning’ by Marcos Lopez de Prado

Tracking the frontier markets debt bubble

23 July 2018EconomicsAfrica, Emerging markets, frontier markets, government bondsNick Dunbar

Frontier market sovereigns are splurging on new borrowing just as investors are cooling on the asset class. A Risky Finance visualisation tool identifies the countries you need to watch.

The Fed’s troubling stress test calculations

12 July 2018BanksCCAR, Stress testsNick Dunbar

The Fed’s annual stress tests and capital analysis amount to a contest between the regulator’s models of large banks in a crisis and those of the banks themselves. The latest disclosures suggest troubling flaws in the Fed’s calculations.

The music won’t stop soon in media-telecom merger frenzy

22 June 2018Mergers & acquisitionsmergers & acquisitionsNick Dunbar

The AT&T Time Warner merger, and the battle between Comcast and Disney for Fox will prompt a vast amount of new borrowing. The spillover effects on other borrowers in the media and telecom sectors could be challenging.

Italy’s populists throw down gauntlet to Draghi

25 May 2018Articles, EconomicsECB, European Central Bank, Italy, quantitative easingNick Dunbar

Italy’s new populist government is on a collision course with the ECB, which is mulling the tapering of QE purchases. But inflation divergence suggests a way out for the central bank.

Hefty swap bets fail to lift Total Return Fund

24 May 2018Fundsexchange-traded funds, PimcoNick Dunbar

In a time of rising bond yields, active bond funds can use derivatives to manage duration risk. But as the experience of Pimco shows, attempts to generate alpha this way do not justify the risks or management costs.

Is Pimco’s Ivascyn hooked on credit default swaps?

3 May 2018Fundscredit default swaps, PimcoNick Dunbar

Pimco’s star manager uses credit default swaps to boost returns and increase inflows to his fund. How transparent are the risks?

Should councils pay interest penalties on government loans?

26 April 2018Municipal FinanceNick Dunbar

Market-based loan repayment penalties imposed by the UK government are being blamed for worsening pressures faced by local councils, and incentivising property speculation. Now calls are being made to reform the system.

US banks grow assets beneath regulatory radar

17 April 2018BanksBank of America, Citigroup, JP Morgan, Wells FargoNick Dunbar

Since adopting Basel III reporting standards three years ago, the biggest US banks have started reducing risk weights while increasing lending. Is this a reflection of a healthy US economy or European-style gaming of internal models?

What causes trading volume?

12 April 2018Research & presentationseconomics, tradingNick Dunbar

Trading volume is much higher than economists predict. Quant Tom Hyer addresses the paradox from the perspective of relative value.

Putting employees over shareholders doomed Deutsche’s Cryan

6 April 2018BanksNick Dunbar

Deutsche Bank’s inability to control its investment bank compensation bill may have doomed John Cryan, analysis of pay disclosures suggests.

Did Bayes’ theorem kill a woman in Arizona?

23 March 2018Technologyartificial intelligence, autonomous vehicles, Google, UberNick Dunbar

The death of a pedestrian hit by an Uber self-driving car highlights the need to understand the decision-making of autonomous vehicles. The story goes back 17 years to when the technology was first refined.

Alexa, destroy my competitors

22 March 2018Articles, Consumer GoodsAmazon, retailNick Dunbar

Amazon is priced for world domination, but is it to blame for the death of traditonal retail?

Can Goldman recover its trading mojo?

9 March 2018BanksBasel III, electronic trading, Goldman Sachs, MiFID 2, P&L distribution, trading, Value-at-risk, Volcker RuleNick Dunbar

We use risk disclosures to analyse Goldman’s plunge in trading profits, and offer five reasons why revenues are unlikely to recover.

Steinhoff, the banks and the bezzle

2 March 2018Articles, BanksNick Dunbar

A scandal at South African group Steinhoff has hit the large banks that lent $1.6bn to the company’s largest shareholder. Differences in the way banks treated the exposure highlight hidden risks in the financial system.

MetLife’s risk failings reveal regulatory weakness

5 February 2018Financials, Insurancelife insurance, MetLife, National Association of Insurance Commissioners, risk-based capitalNick Dunbar

Problems at life insurance giant MetLife show that the opaque system of US state-level insurance supervision is not fit for purpose.

MetLife’s problems highlight flawed US insurance regulation

21 January 2018ArticlesNick Dunbar

Problems at life insurance giant MetLife show that the opaque system of US state-level insurance supervision is not fit for purpose.

Long bonds: on the edge of a precipice?

11 January 2018ArticlesNick Dunbar

Long-dated corporate bonds earned record returns last year, but jitters over QE tapering and US Treasuries could spark a sell-off.

Giants of the S&P500 revisited

31 December 2017StocksNick Dunbar

In 2017, size equalled success in the US stock market, in a way that was more extreme than in the past.

Did EU banks really ‘slash’ exposure to the UK?

13 December 2017Articles, BanksBrexitNick Dunbar

A €350bn decline in the exposure of EU banks to UK counterparties was widely interpreted as an exodus sparked by Brexit, but closer analysis of the data refutes this interpretation.

Blankfein in Frankfurt and the threat to LCH

3 November 2017Articles, BanksBrexit, central clearing, derivatives, Goldman Sachs, London Clearing HouseNick Dunbar

As CCPs dominate the derivatives landscape, London Clearing House now has more than €150 billion in capital from clearing member banks. But a threat from Lloyd Blankfein show how vulnerable LCH has become.

On the trail of 2017’s biggest corporate borrowers

19 October 2017ArticlesApple Inc, Blackrock, corporate bonds, exchange-traded funds, interest rates, mergers & acquisitionsNick Dunbar

Stubbornly low bond yields have prompted a flurry of new corporate borrowing this year. A new Risky Finance tool tracks this activity.

What risk disclosures tell us about Goldman’s problems and Morgan Stanley’s success

8 September 2017BanksNick Dunbar

Morgan Stanley has vaulted over Goldman this year in fixed income trading. Analysis of risk disclosures helps explain the divergence between the two firms.

Council borrowing event presentation

19 July 2017Research & presentationsNick Dunbar

Presentation to council borrowing event, London 18th July 2017

Council property speculation, housing reforms and Grenfell Tower

17 July 2017Articles, Municipal FinanceNick Dunbar

UK government housing finance reforms helped spark a property speculation boom by councils, and may have contributed to the Grenfell tragedy.

Are the Dodd-Frank stress tests running out of steam?

11 July 2017BanksNick Dunbar

Is the Fed’s DFAST stress test telling us that banks are getting safer, or are the banks just getting better at doing the internal modelling?

A History of British Actuarial Thought

30 June 2017Book Reviewsbook reviews, derivatives, economics, life insurance, pensionsNick Dunbar

by Craig Turnbull Palgrave Macmillan 2016 The reputation of actuaries in the UK has declined precipitously in the last three decades. Once they were among the most powerful decision makers in Britain’s financial sector, albeit semi-invisible. Today their role has been sharply curtailed by regulation and market trends, while their profession struggles to articulate its…

Credit

2 June 2017Markets, UncategorizedNick Dunbar

Visualise 10,000 corporate bonds issued by 2,000 companies

The justice of Libor prosecutions

11 April 2017Banksinterest rate benchmarks, LIBORNick Dunbar

Recent disclosures of calls between senior officials at the Bank of England and Barclays shed doubt on the fairness of prosecuting junior staff for Libor rigging.

The injustice of LIBOR prosecutions

11 April 2017Banksinterest rate benchmarks, LIBORNick Dunbar

Recent disclosures of calls between senior officials at the Bank of England and Barclays shed doubt on the fairness of prosecuting junior staff for Libor rigging.

UK local authority debt in six charts

20 March 2017Municipal Financeinterest rates, LOBOs, local governmentNick Dunbar

Dozens of UK councils are paying a significant proportion of tax revenues in debt interest payments, and the burden is worsened by record low interest rates

Barclays LOBO waiver forestalls council legal threat

16 March 2017Municipal FinanceAccounting, Barclays, interest rate risk, LOBOsNick Dunbar

Why did the bank unilaterally waive LOBO provisions in loans last year, losing as much as £1 billion in the process?

Brexit and HSBC’s risk reduction bonuses

15 March 2017Articles, BanksNick Dunbar

HSBC paid senior executives millions in bonuses for achieving RWA reduction targets. But how much was the result of their efforts?

The mystery of Barclays’ LOBO waiver

2 February 2017Articles, Municipal FinanceNick Dunbar

Why did the bank unilaterally waive LOBO provisions in loans last year, losing as much as £1 billion in the process?

Requiem for Dodd-Frank

1 February 2017BanksNick Dunbar

94% of legal settlements paid by international banks have been imposed by US federal regulators, showing that a US retreat from regulation could have profound consequences.

S&P 500 cash holdings and corporate tax reform

1 February 2017StocksNick Dunbar

S&P 500 companies have $2.4 trillion of cash and investments which may soon be repatriated back to the US as a result of tax reforms. We visualise the size of this cash pile relative to market cap.

ETFs, capital arbitrage and Morgan Stanley

22 January 2017Banksderivative assets, exchange-traded funds, high yield bonds, incremental risk charge, Market RWAs, Morgan Stanley, securities financingNick Dunbar

After making dramatic cuts to its balance sheet and capital requirements, Morgan Stanley is boosting returns in fixed income. Is the bank using bond ETFs for regulatory capital arbitrage?

Ranking sovereign debt sustainability

10 January 2017ArticlesNick Dunbar

Plans by the incoming US administration are likely to shake up government bond markets. To help investors, Risky Finance launches a tool to rank sovereign debt sustainability.

Re-risking JP Morgan

7 January 2017Articles, BanksNick Dunbar

Four years ago, large US banks started disclosing Basel market risk capital requirements as part of the Dodd-Frank Act. The bank with the largest market risk-weighted assets was JP Morgan, with $215 billion at the end of 2012. Given the $6 billion of losses that the bank had reported the previous year in its Chief…

Toblerones, Pampers and the retreat from currency hedging

3 January 2017Articles, Consumer Goods, News topicsNick Dunbar

In the wake of unprecedented currency shifts, consumer goods companies are reducing hedging in favour of product sizing techniques to retain customers

Morgan Stanley’s capital secret

3 January 2017Articles, BanksNick Dunbar

After making dramatic cuts to its balance sheet and capital requirements, Morgan Stanley is boosting returns in fixed income. Is the bank using bond ETFs for regulatory capital arbitrage?

Season of goodwill

22 December 2016Articles, BanksNick Dunbar

Christmas is when European banks typically book restructuring costs and goodwill writedowns. A study of quarterly profits shows the divergence versus US banks.

Who benefits the most from ECB bond buying?

14 December 2016ArticlesNick Dunbar

ECB president Mario Draghi says that corporate bond purchases are a success. Using securities lending disclosures allows the hypothesis to be tested with the help of an animated bubble chart.

The great November steepening

23 November 2016Articlesgovernment bonds, political risk, quantitative easingNick Dunbar

Government bond yields in November have been characterised by a steepening trend as the impact of Donald Trump’s election victory sinks in. With globalisation in retreat, and borrowing likely to increase, long-term bond yields may rise further.

How Pimco and Blackrock bond funds use derivatives

19 November 2016ArticlesNick Dunbar

In December 2015, the Securities & Exchange Commission proposed new regulations on the use of derivatives by US registered investment companies. This article looks at the derivatives exposures of two large mutual funds.

Using securities lending data to assess the ECB’s corporate bond purchases

18 November 2016Credit, MarketsNick Dunbar

ECB president Mario Draghi says that corporate bond purchases are a success, but is the effect causation or correlation? Using securities lending data from central banks allows the hypothesis to be tested.

Fund managers find the derivatives habit hard to shake

2 November 2016ArticlesNick Dunbar

Many US mutual funds use derivatives, and now the SEC wants to limit this activity with notional limits and VaR-based tests. A case study of large Pimco and Blackrock funds shows how regulation of this murky area is overdue.

Allianz’s Italian ALM bet looks volatile

1 November 2016Articles, InsuranceNick Dunbar

A bet by insurer Allianz in 2012 to back German life and health liabilities with long-duration Italian government debt paid off handsomely in recent years but is looking risky again as the bonds plunge in the wake of the US presidential election. Italian government bonds with maturity above 15 years returned -7.5% in the first…

The year of frontier debt

27 October 2016ArticlesEmerging marketsNick Dunbar

Emerging market bonds have outperformed most asset classes this year, prompting talk of a QE-induced bubble. But research into global inequality suggests a secular shift into emerging market debt makes sense.

Gold-plated pension promises and the insecure young

12 October 2016Articles, PensionsBHS, FTSE All-share, inequality, pensions, public policy, UK TreasuryNick Dunbar

QE has driven corporate pension liabilities sky-high, and MPs are considering softening inflation-linked promises amid complaints over generational inequality. But British companies’ ever-increasing dividends makes such a move politically tricky.

The tide turns against bank regulation

5 October 2016Articles, BanksNick Dunbar

2016 may be remembered as the year that bank regulation reached its high water mark. With the election of Donald Trump – and his team’s pledge to ‘dismantle’ Dodd-Frank - the possibility of an international race to the bottom can’t be discounted. Ironically, the revolution against regulation began in the heartland of the European Union,…

Close-out netting and safe harbours increase systemic risk

28 September 2016Research & presentationsNick Dunbar

The banking industry has long argued that close-out netting provisions in derivative contracts reduce systemic risk, and successfully lobbied to have 'safe harbour' provisions to protect counterparties from bankruptcy claims. This is embedded in US Generally Accepted Accounting Principles, resulting in trillions of derivatives exposures not being counted on bank balance sheets. However the Lehman…

How the Fed’s physical commodity rule hits Goldman

22 September 2016Articles, Bankscommodity risk, Goldman SachsNick Dunbar

The Federal Reserve’s proposal to sharply raise capital requirements for bank physical commodity holdings puts Goldman Sachs on the spot and highlights the regulatory drive to rebuild barriers between banking and commerce.

Barclays, hard Brexit and EU passporting

21 September 2016Articles, BanksNick Dunbar

The decline in sterling since the Brexit vote has increased Barclays’ leverage. As balance sheet currency hedges expire, the prospect of a ‘hard Brexit’ may lower the value of the bank’s equity, highlighting the importance of retaining an EU passport.

Deutsche, BNP face capital hit from Basel internal model limits

20 September 2016Articles, BanksNick Dunbar

Deutsche Bank and BNP Paribas may be the most affected by Basel Committee proposals to restrict the use of internal models in calculating capital requirements for corporate and bank loans.

Assessing the high yield swoon

10 September 2016ArticlesNick Dunbar

Did junk bond investors overreact to fears about oil and gas sector defaults at the start of the year?

The impact of Basel’s trading book review

20 August 2016ArticlesNick Dunbar

Goldman Sachs may have to double the amount of regulatory capital it holds against market risk as a result of Basel’s fundamental review of the trading book, a Risky Finance analysis shows. Unless they revamp their risk models by 2019, other US banks will also have to boost trading book capital.

Visualising the high yield swoon

18 August 2016Credit, MarketsHigh yield - US, high yield bonds, Markit iBoxx $ Liquid High Yield index, oil & gas, regulationNick Dunbar

Did junk bond investors overreact?

The Taser and the choke lead: How the Fed restrains big banks

9 August 2016FinancialsCCAR, Dodd-Frank Act, Federal Reserve, JP Morgan, operational risk, operational RWAs, regulation, Stress testsNick Dunbar

Operational risk capital for US banks is the highest in the world but the Fed resists formally testing op risk in its stress tests. One reason might be that the Fed would have to explain why the charges need to be so high.

Seven things you didn’t know about the Goldman-Greece swap

29 July 2016Articlesderivatives, Goldman Sachs, GreeceNick Dunbar

15 years after it was signed, the Goldman-Greece swap continues to be a reputational problem for the bank. A longer feature that reviews a decade’s worth of unreported material on the story.

Visualising the high yield swoon

9 June 2016Credit, MarketsHigh yield - US, high yield bonds, oil & gas, regulationNick Dunbar

Were regulatory warnings about bond market herding borne out in the high yield sell off and rebound?

The End of Alchemy: Money, Banking and the Future of the Global Economy

31 May 2016Book ReviewsBank of England, book reviews, central banking, economicsNick Dunbar

A review of Mervyn King’s book

Steel and the pusillanimous pension rule

4 May 2016News topics, Pensionspensions, regulation, steelNick Dunbar

How pension policy cowardice helped doom Britain’s steel industry. Tata’s decision to write off the value of its UK steelmaking business and seek a quick sale, while keeping its Dutch business, is really a story about pension regulation.

Crime, business and benchmark rigging

13 April 2016BanksNick Dunbar

Recent Libor rigging trials highlight the tensions between criminal prosecutions and regulatory probes into banks’ business practices

Moonshots, moonshine and AI’s inflection point

2 April 2016Technologyartificial intelligence, deep learning, Geoff Hinton, Google, machine learning, neural networksNick Dunbar

Artificial intelligence is booming and technology companies are pouring billions into AI research. But has AI really got to a take off point, and what does the history of the field have to tell us about the prospects for success?

Artificial intelligence: boom or bubble?

1 April 2016Articles, Technologyartificial intelligenceNick Dunbar

Deutsche Bank and the Big Short

15 February 2016Banksbanking, CDOs, derivatives, Deutsche Bank, financial innovation, Greg Lippmann, Michael LewisNick Dunbar

The movie ‘The Big Short’ reminds us how the toxicity of Deutsche Bank’s historic activity and culture continue to infect the bank and broader financial system today. Deutsche is the most leveraged big bank in the world, with assets 37 times core equity tier one capital. Half of these assets – $762 billion – are over-the-counter derivatives, the legacy of its growth before the crisis.

Lost Lobos Part 2

19 January 2016UncategorizedKent council, LOBOs, municipal finance, Newham council, Redcar & Cleveland councilNick Dunbar

When I was in my twenties, I worked on a film being shot on location in the London borough of Newham. The film itself, which starred Jude Law and Sadie Frost, was forgettable, but one memory that stayed with me was the all-pervading smell of refined sugar from the nearby Tate & Lyle factory by the river Thames.

Autogeddon

18 January 2016News topicsNick Dunbar

Just over two years ago, I took a train from Berlin to Wolfsburg, to visit a senior executive at Volkswagen. From the station platform the famous chimneys of VW’s vast car plant loomed up. Inside the gate, the company’s vehicles were everywhere, catching

Giants of the S&P500

4 January 2016Stocksequities, equity indices, fund management, inequality, Russell 3000, S&P 500Nick Dunbar

In 2015, size equalled success in the stock market. But did benchmarking make this a self-fulfilling prophecy? Let’s start by looking at the market capitalisation of S&P 500 companies at the end of the year, with colours according to price change.

High yield’s retrenchment

21 December 2015Credit, MarketsCitigroup, commodity risk, credit, credit derivatives, ETFs, High yield - US, lending, Markit iBoxx $ Liquid High Yield indexNick Dunbar

There have been plenty of words written about the high-yield corporate bond market in the last week, but sometimes a chart expresses things better than words.

Newham’s cracked crystal ball

10 November 2015Municipal FinanceBarclays, interest rate risk, LOBOs, local government, municipal finance, Newham councilNick Dunbar

Between July 2007 and November 2008, Newham council entered into 10 range LOBO loans with Barclays worth a total of £238.5 million. New information on the council’s controversial loan portfolio shows the impact of its relationship with Barclays, raising questions about risk management decisions.

Do Labour-run councils pay more to borrow than Conservatives?

8 November 2015ArticlesNick Dunbar

An analysis of UK government data explores the link between average borrowing costs and political control for local authorities

Tambora: The Eruption That Changed the World

13 October 2015Articles, Book Reviewsclimate change, historyNick Dunbar

by Gillen D'Arcy Wood (Princeton University Press 2014) In my last year at Harvard, before I decided to drop out of the PhD program and pursue other things, I took a graduate meteorology class. The class teacher, Brian Farrell, was doing what other professors did and quietly sounded students out about taking him on as…

Autogeddon

1 October 2015Industrials, News topicsBasel rules, carmakers, emissions, regulation, VolkswagenNick Dunbar

Just over two years ago, I took a train from Berlin to Wolfsburg, to visit a senior executive at Volkswagen. From the station platform the famous chimneys of VW's vast car plant loomed up. Inside the gate, the company's vehicles were everywhere, catching the sun like a metallic sea. It crossed my mind that it…

Unravelling LOBOs

8 July 2015Municipal Financebanking, derivatives, LOBOs, local government, regulationNick Dunbar

A few weeks ago, I was with Channel 4 Dispatches reporter Antony Barnett speaking to Sheffield Labour MP Clive Betts. We were on a park bench in some gardens next to the Houses of Parliament and we briefed Betts about our findings on Lender Option Borrower Option (LOBO) loans to UK councils – findings that were seen by a Channel 4 audience of over 1 million last Monday.

How Newham came unstuck with inverse floaters

1 July 2015Municipal Financeinterest rate risk, LOBOs, local government, municipal finance, Newham council, RBSNick Dunbar

In my research for Channel 4 Dispatches, I broke through Newham council’s wall of secrecy and learned that the councilÂ had at least Â£150 million of inverse floater LOBOs (believed to be with Royal Bank of Scotland), along with other councils such as Cornwall, Edinburgh and Newcastle that disclosed these RBS productsÂ in response to Freedom of Information requests. As discussed on the programme, these loans involve councils paying a variable coupon which goes up when market rates go down – coupons that recently have gone above 7 per cent. To understand these products, I priced a Â£25m Newham deal on a Bloomberg terminal, which allows the underlying cash flows to be modelled – from today until 50 years in the future. This is important because the concept of fair value involves combining all of a loan’s future cash flows into a single number.

Borges, Babel and the race against the machine

8 April 2015Comment, Technologyeconomics, fiction, innovation, MathematicsNick Dunbar

In a world of information, the way we measure combinations of words or ideas is important. Some people say it might even save humanity. Last year, economists Eric Brynolfsson and Andrew McAfee suggested that increasing combinations of business ideas could save us from being supplanted by intelligent machines. Like any powerful algorithm, combinatorics is both…

Burning down the house

7 February 2015Structured productsCDOs, credit ratings, litigationNick Dunbar

Ten years after Lehman, nothing evokes the crisis better than the plunge in collateralised debt obligations that was a key indicator of systemic risk at the time. This article includes a visualisation of a unique ratings agency database that will be kept on this site as a matter of public record. They rated every deal,…

Most-read articles of 2014

31 December 2014UncategorizedNick Dunbar

Is the sharing economy a new form of regulatory arbitrage? That was the question posed by my most popular article this year. Published in January, my take on Uber turned out to be prescient, as the ride sharing company attracted increasing regulatory headwinds around the world. The second most-read new article is actually a pair…

The Imitation Game and The Interview

23 December 2014Commentcryptography, cyber security, Enigma, The Imitation Game, World War IINick Dunbar

I saw The Imitation Game last week "“ the biopic of Alan Turing "“ and it prompted me to write something about Jack Good, one of the Bletchley park codebreakers depicted in the movie. In April 2003, while researching my unpublished probability book, I visited him in Blacksburg, Virginia. I was in New York on…

House of Debt

18 December 2014Book Reviewsbanking, economics, lending, public policyNick Dunbar

The authors are experts at crunching microeconomic data on American borrowing patterns and uncovering explanations for what they see. Their starting point is the remarkable statistic for US household debt, which doubled to $14 trillion between 2000 and 2007. This build up of debt was responsible for the ensuing havoc because of its effect on borrowers, Mian and Sufi argue.

To understand this argument, consider mortgage borrowers versus those who invest in their mortgages via bank deposits. The borrowers tend to be poorer than the investors, who have spare cash. As Mian and Sufi put it, a poor man’s loan is a rich man’s asset.

However, the risk distribution is highly asymmetric because mortgage holders have a senior claim on property while the borrowers’ equity claim is junior, and gets wiped out first. When US house prices fell from late 2006 onwards, losses were concentrated among the poorest segment of the population who had levered exposure, while the richest segment ““ the savers ““ were cushioned.

That explains why inequality increased during the Great Recession, but Mian and Sufi don’t stop there. Using economic analysis that reads like a detective story, they show how the evaporation of poor peoples’ wealth led to a collapse in spending, effectively causing the Great Recession itself. To show causality, they point out that spending initially fell the most in areas of biggest housing wealth declines.

Lost Lobos Part 2

16 December 2014Economics, Municipal Financeinterest rates, Kent council, local government, municipal finance, Newham council, public policy, Redcar & Cleveland councilNick Dunbar

Niedrigzinsangst

29 October 2014Insurancecentral banks, deflation, government bonds, insurance, interest rate risk, Stress testsNick Dunbar

Why can't the ECB bring itself to stress test banks for deflation? I was thinking about this question when I remembered an episode from the past. Just over ten years ago, I took a train from Frankfurt to the sleepy spa town of Wiesbaden. It was the sort of place where a lone taxi is…

Lost Lobos

24 October 2014Municipal Financederivatives, Kent council, LOBOs, municipal finance, public policyNick Dunbar

For as long as most people can remember, UK municipal finance has been safe and boring. In the wild days of the 1980s, Hammersmith & Fulham council almost went bust speculating in derivatives, and was saved by a landmark House of Lords ruling. Since then, UK council borrowing has been tightly constrained by central government while derivative use has been banned.

In the Light of What We Know

15 October 2014Articles, Book ReviewsJP MorganNick Dunbar

by Zia Haider Rahman (Picador 2014) What kind of fiction do they read at Goldman Sachs? A trader I know there recently recommended In the Light of What We Know, Zia Haider Rahman's debut novel. I could see why he was intrigued when I picked the book up. Its two main characters study mathematics and physics…

Stress Test: Reflections on Financial Crises

23 September 2014Articles, Book Reviewscentral bankingNick Dunbar

by Timothy F Geithner (Random House 2014) If you had perfect foresight and were going to pick the best regulator or policymaker capable of dealing with the global financial crisis and its aftermath, whom would you choose? You'd probably want someone with a track record of dealing directly with crises, perhaps in emerging markets, and…

Through the eyes of a speculator

15 September 2014Markets, Mergers & acquisitionsM&A, mergers & acquisitionsNick Dunbar

Outside of financial crises, mergers and acquisitions are the closest the stock market comes to high drama. Companies in play engage with investors and the public using a well-rehearsed script: Acquirers woo target shareholders while target companies publicise the value of independence. The biggest, most dramatic takeovers can involve antitrust regulators and politicians as well.…

Fear and liquidity in the high-yield market

19 August 2014Credit, MarketsETFs, investing, trading, US high yieldNick Dunbar

Junk bond funds are seeing record outflows. This has been described as a 'six-sigma event', in other words, six standard deviations away from the mean weekly flow, something that if normally distributed should only be expected once in millions of years. By definition that's unusual, but in the context of broader investment in riskier corporate…

Shredded: Inside RBS, the Bank that Broke Britain

12 August 2014Book ReviewsABN Amro, banking, Fred Goodwin, Ian Fraser, RBS, regulation, ShreddedNick Dunbar

Ian Fraser Birlinn 2014 A bank whose bailout costs Â£45 billion deserves to have more than one book written about it. In September 2013 we had Iain Martin's Making It Happen (see my review here), and now fellow Scottish journalist Ian Fraser has published Shredded. Fraser's 500-page book piles on the detail as we meet a cast…

Volcker Sunlight Should be the Best Disinfectant

25 July 2014Banks, Financialsbanking, JP Morgan, regulation, regulatory VaR, risk models, stress VaRNick Dunbar

On the fourth anniversary of the Dodd-Frank Act, the big US banks are still black boxes in terms of their trading activity. However regulators are now getting a bit more information. Over the last month, the big banks have started providing them with so-called reporting metrics under the Volcker Rule, so that the rule’s curbs on proprietary trading can be enforced.

An Introduction to Quantitative Finance

27 June 2014Book Reviewsderivatives, quantitative analysis, Stephen Blyth, textbookNick Dunbar

Stephen Blyth Oxford University Press, 175pp If one were to write a creation myth for modern finance, the wave of mathematicians and physicists who left academia for Wall Street from the mid-1980s onwards would be at the heart of it. As Stephen Blyth recounts in the preface to his book, these quant pioneers knew virtually…

The In/Out Question and European Spring

18 June 2014Book ReviewsEuropean Spring, Philippe LegrainNick Dunbar

The In/Out Question: Why Britain should stay in the EU and fight to make it better by Hugo Dixon (Kindle Single, 130pp) European Spring: Why our Economies and Politics are in a Mess and How to Put Them Right by Philippe Legrain (Amazon print-on-demand, 448pp) As the May elections to its parliament showed, the…

The Second Machine Age: Work, Progress and Prosperity in a Time of Brilliant Technologies

17 March 2014Book ReviewsAndrew McAfee, Erik Brynjolfsson, jobless recovery, technology, The Second Machine AgeNick Dunbar

Erik Brynjolfsson and Andrew McAfee WW Norton, 2014 Rapid technological change has become such a constant in our lives that it's easy to forget what the world was like before computers, the Internet and social media apps. Increasingly, these innovations are reinventing the economy and transforming corporations and the lives of individuals. Are these changes…

Disruptive Business Models, Uber and Plane Crashes

30 January 2014Technologyinnovation, technology, transportation, UberNick Dunbar

Disruptive internet-based business models have upended traditional industries like recorded music, newspapers and retailing. The latest flurry of innovation involves start-ups that take a service traditionally provided by a regulated firm - such as a hotel or taxi company - transforming it into commission-paying transactions between buyers and sellers. Accessed via smartphone apps and 'regulated'…

Most-read articles of 2013

30 December 2013ArticlesNick Dunbar, web statisticsNick Dunbar

As the year ends, I thought it would be interesting to share with you the most-read articles on this website for 2013. Unsurprisingly, the review of Nassim Taleb's bookÂ Antifragile takes first place. Published just over a year ago, this review not only got the most views in the past year, but is the most-read article…

The New York Fed, Goldman and Regulating Conflicts

17 October 2013BanksGoldman Sachs, litigation, New York Fed, regulationNick Dunbar

In a week dominated by the government shutdown, the most interesting financial regulatory story to come out of the US was the lawsuit by former employee Carmen Segarra against the New York Fed. The lawsuit, which was first reported by Propublica on October 10 and widely covered afterwards, alleges that the NY Fed unjustly fired…

Confidence, Doubt and Climate Change

4 October 2013Articlesclimate change, physics, public policyNick Dunbar

24 years ago I was a graduate student studying earth and planetary science at Harvard. My advisor, Professor Mike McElroy, was an expert on atmospheric chemistry and I helped him teach a course to 300 undergrads in what was known as the 'core curriculum'. As a special treat for the students, McElroy invited his friend,…

ICAP, the half-way house on the road to Libor reckoning

27 September 2013Banks, MarketsICAP, interest rate benchmarks, litigation, operational risk, RBS, regulation, UBSNick Dunbar

What are we to learn from the charges that came out against interdealer broker ICAP and its staff over the manipulation of Libor rates? In three separate regulatory complaints, from the UK Financial Conduct Authority, US Commodity Futures Trading Commission and Department of Justice, once again we read emails and chat logs outlining intent to…

Lehman Anniversary Special: Fooling Some of the People All of the Time

16 September 2013Book ReviewsDavid Einhorn, Fooling Some of the People All of the Time, Greenlight Capital, hedge funds, short sellingNick Dunbar

David Einhorn John Wiley & Sons, 2011 In his 1991 novel Time's Arrow, Martin Amis tells the story of a Nazi war criminal as if lived backwards in time. The time reversal shockingly inverts the morality of the protagonist's actions---as an old man he snatches toys from children and sells them for money, while in…

JPMorgan vs. Fukushima

30 August 2013Articles, Banksbanking, Basel rules, comprehensive risk measure, incremental risk charge, JP Morgan, operational risk, regulatory VaRNick Dunbar

After JP Morgan’s London Whale fiasco, the new trading book risk measures introduced by Basel after the financial crisis began to be supplanted by operational risk capital.

Quant Investing Comes of Age

16 August 2013Articles, Fundsfactor models, fund management, investing, MSCI Barra, smart betaNick Dunbar

When I wrote the Devil's Derivatives I looked at the risk modelling behind the ratings of CDOs, bank trading and credit portfolios. Through a combination of bad incentives and leverage, these models performed very badly and contributed to the financial meltdown of 2007-8. Lurking in the background of my analysis was traditional portfolio modelling as…

The Signal and the Noise: The Art and Science of Prediction

28 July 2013Book Reviewsclimate change, forecasting, gambling, Nate Silver, probability, The Signal And The NoiseNick Dunbar

Nate Silver Allen Lane 2012 It's hard not to be impressed by Nate Silver. He is a quant journalist who has mastered diverse areas such as poker playing, sports analysis and psephology. He showcased his election forecasting skills in his FiveThirtyEight blog that was picked up by the New York Times. That propelled him into…

Of Fear and Models

22 July 2013BanksBasel rules, BNP Paribas, leverage ratios, risk models, sovereignNick Dunbar

My last post on Anglo-Irish Bank got me thinking some more about the question of trust and banking. The subject came up in conversations I recently had with senior bankers - BNP Paribas co-chief operating officer Philippe Bordenave and Deutsche Bank CFO Stefan Krause. I asked them about the declining trust in bank risk models,…

Basel, Bayes and Anglo’s Arse-Picking

5 July 2013Articles, BanksAnglo Irish Bank, banking, Basel rules, eurozoneNick Dunbar

The leaked tapes of conversations between two senior Anglo-Irish Bank officials in September 2008 highlights the problem that bankers can't be trusted. Discussing the size of bailout they should request from Irish taxpayers, the Anglo-Irish bankers were recorded saying that the €7 billion figure was "picked out of my arse" (the actual amount needed would…

Regulatory Tussle over Bail-Ins, Depositors Highlights Complexity of Bank Debt

4 June 2013Articles, Banksbank debt, bank resolution, banking, Basel rulesNick Dunbar

Before the financial crisis began in 2007, banks created and invested in trillions of dollars of complex securities such as collateralized debt obligations. Many of these investments subsequently defaulted or lost the top ratings given to them by ratings companies. With investors suspicious of anything valued or rated using hard-to-fathom models, markets in CDOs and…

Quantitative Easing, Interest-Rate Derivatives: A Toxic Combination

17 May 2013Banks, Commentderivatives, interest rate risk, litigation, municipal finance, RBSNick Dunbar

Quantitative easing has resulted in collateral damage. Municipalities, public-owned entities and small companies have been damaged as a result of derivatives contracts that locked them into paying high interest rates before the full effect of QE became apparent. Investment banks that sold such contracts have been accused of mis-selling them, lawsuits are winding their way…

Bank leverage and the lessons of the crisis

19 March 2013Articles, BanksAccounting, Cyprus, deposits, leverage ratiosNick Dunbar

"The final banking crisis, which terminated in the banking holiday early in March 1933" - So begins a dark passage in Milton Friedman and Anna Schwartz's Monetary History of the United States, which last Friday arose from ancient slumbers in the eastern Mediterranean. The turmoil sparked by the proposed tax on Cyprus bank depositors makes…

Antifragile

12 December 2012Book ReviewsAntifragile, Nassim Taleb, optionalityNick Dunbar

Nassim Taleb Allen Lane 2012 I first met Nassim Taleb in New York in the spring of 1998 while working for a trade magazine. I had been commissioned to edit a supplement on the 25th anniversary of the publication of the Black-Scholes option pricing formula, while Taleb at the time was a currency option trader…

Information Without Meaning

19 November 2012Book ReviewsClaude Shannon, information theory, James Gleick, The Information A History a Theory a FloodNick Dunbar

The Information: A History, a Theory, a Flood James Gleick 4th Estate, 2011 When I was starting out as a writer, James Gleick was something of a role model for me. His best-selling 1987 book Chaos was popular science writing at its best, telling the stories of the butterfly effect, fractals and strange attractors weaved…

What JP Morgan’s release of VaR has in common with sex and computer viruses

15 October 2012ArticlesBasel rules, JP Morgan, regulatory VaR, risk models, technologyNick Dunbar

In The Devil’s Derivatives, I tried to answer two questions at the heart of the financial crisis. Why did the trading aspect of banking (the ‘casino’) get to grow so big? And why did regulators allow that to happen? My answer hinged upon something called Value-at-Risk that gave bankers and regulators confidence that risks were measurable, were small compared to trading positions and could be controlled.

It’s now the twentieth anniversary of the invention of VaR at JP Morgan in the early 1990s, and I recently had the opportunity to speak with Jacques Longerstaey, who was one of its principal inventors.

The basic story has been told many times. Dennis Weatherstone, the English-born chairman of JP Morgan wanted to understand the risks of the bank’s fast-growing trading business. “At the end of the day, I want one number”, Weatherstone told Longerstaey and the risk team. The result was VaR.

What fascinated me was that in the fullness of time, Longerstaey was prepared to speak frankly about the real business context behind VaR. An explanation was needed because having invented what was seen as a sophisticated risk management tool putting it light years ahead of other trading firms, JP Morgan decided in 1994 to do something surprising. The bank put this valuable intellectual property in the public domain, publishing what it called the Riskmetrics technical document, which Longerstaey co-authored.

The Higgs boson and me

18 July 2012CommentNick Dunbar, physicsNick Dunbar

I first encountered the Higgs boson in 1989 on a blackboard in an advanced quantum field theory class for graduate students at Harvard University. It was the point that I realized that the life of a theoretical physicist was not for me. I remember the lecture theatre well. There were three blackboards side by side,…

A week in banking: what have we learned?

2 July 2012Articles, Banksbanking, Barclays, derivatives, interest rate benchmarks, JP Morgan, RBS, regulationNick Dunbar

In the last week, we saw major developments in two big scandals - Libor rigging and swap mis-selling in the UK - and the end of the second quarter which is likely to draw a line under a third big scandal - the 'London Whale' losses at JP Morgan. I have some thoughts about these…

Thinking, Fast and Slow

23 May 2012Book Reviewsbehavioural economics, Daniel Kahneman, Gerd Gigerenzer, Nassim Taleb, Thinking Fast And Slow, two-system thinkingNick Dunbar

Daniel Kahneman Penguin/Allen Lane 2011 I first met Daniel Kahneman in May 2001 when I was researching my still-unpublished book about probability. I had expected to visit him at his office in Princeton's economics department, but for some reason I can no longer remember, Kahneman said the interview should take place at his suburban house.…

Nature Bites Back In New, Messy World of Derivatives

4 May 2012Bankscredit valuation adjustment, derivatives, physics, risk modelsNick Dunbar

Twelve years ago, in 'Inventing Money' I explained the principles of option pricing to a general audience. Although the maths looked complicated, the financial market that Fischer Black, Robert Merton and Myron Scholes modeled in the early 1970s was really quite simple. You bought and sold derivatives, such as options or forward contracts, and traded…

From the UK to Italy, an interest rate derivatives headache

19 March 2012Economics, Insurancebanking, behavioural economics, derivatives, interest rate risk, Italy, Morgan StanleyNick Dunbar

My story (with Elisa Martinuzzi) about Italy admitting it paid Morgan Stanley billions to unwind derivatives, and the UK newspaper coverage reporting on the alleged mis-selling of derivatives by banks like Barclays to small British companies, have something in common. Small British companies and Italy share an environment where both of them are finding it…

Goldman and Greece revisited

12 March 2012Articles, Banksderivatives, eurozone, Goldman Sachs, Greece, sovereign debtNick Dunbar

Most journalism is a hit-and-run affair. We talk to sources, check facts, agree quotes, wrestle with editors and lawyers; the excitement builds up to the point the story appears...and then we drop the whole thing and move on. When I published my story on Goldman Sachs and Greece in July 2003, the almost-universal reaction was:…

Goldman swap shows Greece was Europe’s subprime nation

24 January 2012Articles, Banksderivatives, eurozone, Goldman Sachs, sovereign debtNick Dunbar

All the talk about Greece trying to persuade its creditors to swap some once-valuable bonds for new ones worth much less reminds me of another Greek swap that I wrote about in 2003. That deal with Goldman Sachs, designed to conceal part of the country's ballooning debt-to-GDP ratio in order to conform to the rules…

The FSA, RBS and the ‘pack of lies’

23 December 2011Articles, Banksbanking, Basel rules, RBS, regulationNick Dunbar

On page 277 of The Devil's Derivatives, there is a short account of how the U.K. Financial Services Authority supervised the Royal Bank of Scotland in the spring of 2008. It's only a small part of the book, but it caused me a disproportionate amount of trouble, including a legal threat from the FSA that…

From hedge fund manager invective to EU veto

13 December 2011Articlesderivatives, eurozone, hedge fundsNick Dunbar

Hearing David Cameron's justification for his rejection of last week's proposed EU treaty changes on the basis that he was defending the City of London as a financial centre, I was reminded of a talk given back in April by Michael Hintze, the head of $11 billion hedge fund CQS and a major Conservative party…

Models. Behaving. Badly.

28 November 2011Book ReviewsEmanuel Derman, models, Models Behaving Badly, quantitative analysis, SpinozaNick Dunbar

Emanuel Derman John Wiley & Sons Ltd, 2011 I first met Emanuel Derman in the late 1990s, when I was starting out as a financial journalist. I felt an immediate affinity. I respected him as a refugee from physics who had progressed much further in the field than I ever had. In person and in…

The Volcker Rule and Barclays’ UK Bear Hug

15 November 2011Banksbanking, Barclays, public policy, regulationNick Dunbar

On Nov. 3rd, I attended the inaugural BBC Today Business Lecture, given by Bob Diamond, the chief executive of Barclays. The man who told the UK Treasury Select Committee that it was time to stop apologising for the financial crisis had been given an image makeover. Taking an ingratiating tone towards his audience of BBC…

We Need to Talk About Sovereign Credit Default Swaps

31 October 2011Articlesderivatives, eurozone, sovereign debtNick Dunbar

You've seen the movie. Some bankers become the proud parents of a new-born financial instrument. At first, little CDS seems like everything a parent could want "“ a hedge against the downsides of middle-class existence. But as CDS gets older, disturbing signs appear. CDS is too knowing, too negative "“ focused on the financial death…

The Eurozone, political dreams and financial engineering

24 October 2011Articlesderivatives, eurozone, sovereign debtNick Dunbar

How do you turn uncertainty into safety? The euro was supposed to replace the uncertainty of doing business between multiple countries with a single economic entity, so safe that its members could borrow money close to the price paid by the strongest, Germany. One good thing about financial markets is that they put a price…

Are investment banks like nuclear power plants?

16 September 2011Articles, Banksbanking, operational risk, Societe Generale, trading, UBSNick Dunbar

We don't know the full details of how Kweku Adoboli lost $2 billion at UBS, but as I watch an industry in decline, an analogy springs to mind. Yesterday I had a long conversation with one of the former managers in the chain of command above Jerome Kerviel at Societe Generale. After losing his job…

A free lunch at everyone’s expense

14 August 2011Articlesbehavioural economics, public policy, tradingNick Dunbar

They spoke in a barely comprehensible 'patois' and adopted the trappings of consumerism, powered by new forms of technology. The forces of the law were nowhere to be found. Seeing high street institutions standing unguarded in front of them, they went in and pillaged without hindrance, prompting a mixture of anger and soul-searching among the…

Déjà Vu All Over Again

8 August 2011Articlescentral banking, eurozone, sovereign debtNick Dunbar

Are we on the verge of another Lehman weekend? The crisis of September 2008 unfolded in several stages: 1) a long bubble in subprime and credit markets in general, in which Lehman and other banks profited from by increasing their balance sheet leverage, 2) following a realisation that subprime was a haven of fraudulent lending,…

The Devil’s Derivatives is published

12 July 2011ArticlesDevil's Derivatives, Nick DunbarNick Dunbar

In January 2008, I scribbled down some ideas for a book about what was then a crisis sparked by subprime mortgages, based on my decade of experience writing about financial derivatives. Three-and-a-half years later, the book has now been published. It was the feeling of being trapped inside history that prompted me to write the…

A vision for Europe and its discontents

10 May 2011Articlespublic policy, regulationNick Dunbar

Today, I participated in a panel discussion at the Economist Bellwether Europe conference on 'A Vision for Europe', together with Estonian finance minister JÃ¼rgen Ligi, head of markets at the UK Financial Services Authority Alexander Justham, and the chief executive of the Association for Financial Markets in Europe, Simon Lewis. Below are my answers to…

The tears of a CDO manager

28 February 2011Articlesfinancial innovation, litigationNick Dunbar

How seriously should bystanders treat the defamation complaint by CDO manager Wing Chau against the author Michael Lewis? Leave aside the fact that under the UK libel system, Chau would probably take Lewis to the cleaners, and ask the question according to the standards of the land of free speech. The butt of 'Spider-man at…

New year, new developments

12 January 2011ArticlesDevil's Derivatives, Nick DunbarNick Dunbar

The saga of The Devil's Derivatives is drawing to a close. I am pleased to announce that Harvard Business Review Press will now be publishing the book in both the UK and the US. The only downside is that the publication date will be delayed by three months to July 12th 2011 to coordinate the…

Insurer of last resort

22 December 2010Articlesfinancial innovation, insuranceNick Dunbar

I was searching for a note of irony in today's Financial Times article about how banks are trying to persuade insurers and pension funds to accept high-yield structured product collateral in return for providing long-term funding. First mooted in the latest Bank of England Financial Stability Review, the point is to wean banks off government…

Ageing pains

22 December 2010ArticlesNick Dunbar

7th December 2010 It is hard to see capitalism working without committed stakeholders. But in the UK, the idea that pension funds might play that role as the primary owners of equities and real assets is beyond the pale. The change of mood has many causes. In the last two decades, pension scheme sponsors increased…

An imaginary wolf pack

22 December 2010Articlescredit default swaps, eurozone, hedge fundsNick Dunbar

1st December 2010 Politicians' attempts to blame hedge funds for the euro zone crisis are desperate. Disappointingly for the conspiracy theorists, the idea that a cabal of Soros-style speculators is engineering a meltdown is an unlikely explanation of current market turmoil. What appear to be coordinated bets against European sovereigns have less sinister explanations. Firstly,…

Back to the future

22 December 2010ArticlesAccounting, eurozone, pensionsNick Dunbar

23rd November 2010 Policymakers trying to find a fair resolution to the current European debt crisis might benefit from the insights of a taxpayer beamed back in time from 2050. That may be impossible, but economists are attempting the next best thing by discounting pension promises and tax revenues and comparing them with today's more…

Arbitraging the client

22 December 2010Articlescredit rating arbitrage, CRSMNick Dunbar

30th November 2010 Plenty of practices once considered normal are now beyond the pale. Depending on the outcome of a High Court trial involving Barclays, credit rating arbitrage may soon join drink-driving and smoking in the office as behaviour no longer considered acceptable. The case, brought by Cassa di Risparmio della Repubblica di San Marino…

The ballad of Ireland and Germany

15 November 2010Articleseurozone, public policy, regulationNick Dunbar

While the drama of Ireland's financial crisis reached a boiling point last week, I thought about the time I stayed near Dublin some twenty years ago. The infrastructure was decrepit, and I remember a hand-painted sign erected on the highway that read 'Please Minister Flynn, repair our awful roads'. As I visited the country periodically…

Emerging from the fact-checking tunnel

8 November 2010ArticlesNick Dunbar

In the small hours of Friday morning I sent off the copyediting corrections for The Devil's Derivatives. This text "“ all 95,000 words of it "“ is pretty much the final draft of the book. I didn't anticipate the intense back-and-forth of the fact-checking over the last two months. Along the way, I encountered a…

The stem cell challenge

19 October 2010Articleslongevity risk, medicine, science, stem cellsNick Dunbar

Last weekend, I attended a lecture given by Douglas Melton, the director of Harvard University's Stem Cell Institute. Stem cells are the medical equivalent of the philosophers' stone, especially those in human embryos which spontaneously differentiate themselves into heart, brain, liver and other cells that make up the body. The stem cells we possess as…

A US publication date – at last

16 September 2010ArticlesHarvard Business Review Press, The Devil's DerivativesNick Dunbar

On April 7, 2011, The Devil's Derivatives will be published in the United States. I know I've given over-optimistic signals before, but with the 3rd draft now with the Harvard Business Review Press copy editor, and an Amazon.com page where you can pre-order, it looks like this thing is finally happening. I don't have a…

Breaking up banks by stealth

20 July 2010Articlesbanking, public policy, regulationNick Dunbar

When the UK coalition government declared that an independent commission would advise on the thorny question of whether to break up Britain's banks, one might expect nothing to be done until the report is completed late in 2011. However, the constraints of market and regulatory timetables mean that policy decisions need to be taken now.…

Stabilizing an unstable economy

19 July 2010Book Reviewsclimate science, economics, Hyman Minsky, Stabilizing an unstable economyNick Dunbar

Hyman Minsky McGraw Hill 2008 Early on during my ultimately-to-be-abandoned Harvard PhD studies in climate science, I remember talking to fellow graduate students about the long-term prediction ability of global atmospheric computer models. These models divide the atmosphere (and sometimes the oceans too) into a three-dimensional grid covering the globe. The detail of real sky…

Are you sophisticated?

11 July 2010Articlesderivatives, Goldman Sachs, Henry PaulsonNick Dunbar

27 May 2010 The word 'sophisticated' gets used a lot in the world of derivatives. The dictionary defines the term as 'experienced, worldly, cultured; discriminating in taste or judgement, subtle, showing awareness of the complexities of a subject'. In high finance, it matters whether the definition is satisfied. "These were sophisticated investors" has become banks'…

More prudent than the Pru

21 May 2010ArticlesABN Amro, FSA, insurance, The PrudentialNick Dunbar

10 May 2010 It seems unfair to compare Prudential to the casualties of the recent banking crisis. The UK-based insurance group had a good credit crunch. It weathered the crisis well and emerged in a stronger position than its competitors, some of whom, like AIG, ended up as wards of the state. All the same,…

Winner takes all

20 May 2010Articlesderivatives, financial innovation, hedge fundsNick Dunbar

Reading about the German government's abrupt decision to restrict sovereign credit default swaps, I was reminded of July 2009 when I met John Paulson at the New York offices of his eponymous hedge fund. I was prepared to be impressed. It isn't every day that you meet a man who has just made six billion…

How Goldman Sachs fell out with the SEC

20 May 2010ArticlesGoldman Sachs, John Paulson, Risk magazine, SECNick Dunbar

In December 2000 I received an email from the Goldman Sachs press office in New York, nominating the firm for Risk magazine’s “Risk Manager of the Year” award. Central to the pitch was how the Wall Street bank had run a boot camp for its supervisors at the U.S. Securities and Exchange Commission, training them in concepts like value-at-risk and derivatives hedging.

It was a win-win move, both sides told me. Goldman ensured its regulator was up to date with financial innovation and earned brownie points for its efforts. By offering a “light-touch” regime for its charges, the SEC hoped to prevent the securities firms under its purview from basing their fast-growing over-the-counter derivatives operations in London.

I was technical editor of Risk at the time and I remember feeling a sense of wonder at the regulator’s willingness to take lessons from one of the firms it policed. But I could also accept that Goldman was motivated by good citizenship. If derivatives were coming to Wall Street, why shouldn’t Wall Street’s best firm join forces with its watchdog to ensure that everything was done properly? The Risk Manager of the Year Award for 2001 went to “¦ Goldman Sachs.

But the SEC did not realise how innovations like the credit default swap would later transform the markets it regulated. Its mission of ensuring market fairness was to collide head on with new business imperatives driven by the “derivativisation” of the credit market.

My best ever scoop?

1 March 2010Articlesderivatives, eurozone, sovereign debtNick Dunbar

The pressure of a second draft deadline for my book was not quite enough to make me ignore the excitement about Goldman Sachs and Greece, especially since I was the one that broke the story six and a half years ago. You can read my reflections on the Goldman deal and its aftermath in this…

Goldman, Greece and a troubling tango

1 March 2010Articles, Comment, Risky Financeeurozone, Goldman Sachs, Greece, Risky FinanceNick Dunbar

Risky Finance 18 February 2010 Six-and-a-half years ago, Goldman Sachs found itself reading about a huge derivatives transaction that was meant to have been kept top secret. The story, which I published in Risk magazine in July 2003, detailed how the bank had used giant customised swap transactions to help Greece's public debt management agency…

A progress update

15 January 2010ArticlesNick Dunbar

Back in August, I proudly announced that I had completed the first draft of the Devil's Derivatives. Well, a first draft is all it was and having stood back, my publisher and I agreed that it could be improved. The reason I have been quiet since October is that I have been working hard on…

Nudge and Predictably Irrational

13 January 2010Articles, Book Reviewsbehavioural economics, Cass Sunstein, Dan Ariely, Nudge, Predictably Irrational, Richard ThalerNick Dunbar

Nudge: Improving Decisions About Health, Wealth and Happiness by Richard Thaler and Cass Sunstein ( Yale University Press, 2008) Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely (Harper Collins, 2008) Just over a year ago, I made a rough estimate of the size of my income tax bill that I would…

Back to the future

15 October 2009ArticlesCDOs, compensation, fair valuation, Higgs, Holger Nielsen, Large Hadron Collider, Masao Ninomiya, quants, theoretical physics, VARNick Dunbar

As a former graduate student in physics, I couldn't fail to be amused by the idea that the laws of nature could act to prevent their own discovery. The inspiration for this idea comes from the history of two attempts to engineer nuclear collisions at sufficiently high energies to create the Higgs boson "“ the…

CDO: solution or scam?

5 October 2009ArticlesCDOs, Fitch, HSH Nordbank, litigation, structured products, subprime, UBSNick Dunbar

On 28 September 2009, a significant development occurred in the post-credit crunch legal reckoning. After eighteen months of transatlantic legal wrangling, Germany's HSH Nordbank was given the green light by a New York judge to proceed to trial in its case against Swiss giant UBS over what it alleges was a mis-sold collateralised debt obligation…

The hidden price of talent

9 September 2009Articlesbonuses, credit derivatives, derivatives sales, Deutsche Bank, G20, Goldman Sachs, Royal Bank of Scotland, UBSNick Dunbar

Multimillion bonuses are back and G20 nations are promising to crack down on excesses at the forthcoming Pittsburgh summit. But just what talents do these lavish rewards buy? The debate has mainly focused on traders. But some of the most important recent hires aren't in trading - they're in sales. Take Antonio Polverino. According to…

The Devil’s Derivatives: first draft completed

20 August 2009ArticlesNick Dunbar

I read somewhere a long time ago that books are abandoned rather than completed. It didn't quite feel like that in a New York apartment in the early hours of yesterday morning, when I wrote 'the end' at the bottom of a chapter and emailed it to my publishers. I feel not only that a…

Barclays CDOs in Ruritania

31 July 2009Articles, Comment, Risky FinanceBarclays, CDOs, CRSM, Italy, Risky FinanceNick Dunbar

With its plume-helmeted soldiers and a ban on outsiders marrying elderly citizens for money, there is something of a comic opera quality about San Marino, the micro-state located on a hilltop near the Italian town of Rimini. Yet for Italian authorities, there is nothing comic about San Marino, whose website proudly talks up the principality’s banks as being beyond the reach of jealous Italian taxmen.

Last week, the Italian authorities struck back. Prosecutors in Bologna arrested the chairman, chief executive and other senior management of San Marino’s biggest bank, CRSM. Meanwhile, the Bank of Italy seized control of CRSM’s Bologna-based subsidiary Delta, which is one of Italy’s top dozen consumer finance companies.

While the Bank of Italy press release accompanying the seizure talks about flaws in San Marino’s money laundering controls, the ostensible reason for taking control of Delta was that CRSM had used hidden stakes to enjoy 100 percent ownership of Delta – which the Bank of Italy had expressly forbidden in the light of its money laundering concerns.

However, what the Bank of Italy release did not mention was how CRSM obtained financing for Delta’s â‚¬4.5 billion balance sheet, which grew sixfold between 2003 and 2007. An ongoing dispute in London’s High Court has shed light on how credit derivatives were used to achieve this, out of sight of the Italian and San Marino regulators, with about â‚¬700 million of the financing provided by Barclays Capital.

Corporate Nannies

12 February 2009Articles, Comment, Risky FinanceBarclays Capital, CDOs, complex derivatives, HSH Nordbank, Massimo Catasta, Poste Italiane, Risky FinanceNick Dunbar

Risky Finance Do investment banks owe a duty of care to their corporate customers---in a similar way that they do to widows and orphans? Or should the principle of "caveat emptor" remain sacrosanct? The issue is central to two lawsuits recently filed in London. In one, an Italian company lost its shirt after buying an…

Liquidity as myth

12 February 2009ArticlesCitigroup, Euro MTS, FSA, liquidity, Risk FinanceNick Dunbar

Risky Finance 21 March 2005 Proteus was a Greek mythological sea-god who was so slippery he could change into any shape he chose. There is no more protean word in finance than liquidity. For some, the word denotes the excess of cash currently chasing meagre market returns, For others, the word has a Keynesian meaning:…

Pension funds call in their loans

12 February 2009Articlespension funds, Risky Business, The Pensions RegulatorNick Dunbar

Risky Finance 17 May 2005 The cartoon character Spiderman starts out as a geeky, put-upon student who after getting bitten by a mutant spider, develops the power to climb walls and spin webs---powers that he uses to fight crime. Something similar is happening to the lowly UK pension trustee, who having been bitten by a…

Weapons of mass deception

12 February 2009Articles, Comment, Risky Financederivatives, Italy, Life and Pensions magazine, Munich Re, Risky FinanceNick Dunbar

Risky Finance 22 November 2006 A rash of derivatives scandals a decade ago led to the tightening up of accounting rules for companies. But sadly not the same has been true of government accounting rules, at least in continental Europe. Both central governments and local authorities alike have become heavy derivatives users. This generates enormous…

The mystique of structured products

12 February 2009Articles, Comment, Risky FinanceFSA, Greece, JP Morgan, pension funds, Risky FinanceNick Dunbar

Risky Finance 17 May 2007 The session of the Greek parliament on 3rd May was an especially stormy one. A few days earlier, the minister for employment had been forced to resign, and the socialist opposition smelled blood. Why, clamoured the socialist MPs, had the finance ministry hired JP Morgan to package loans linked to…

Dr Frankenstein of Dusseldorf

12 February 2009ArticlesCDOs, Germany, IKB, Risk magazineNick Dunbar

Risky Finance 8 August 2007 While the mainstream financial press may have been shocked by the news from IKB last week, the credit derivatives cognoscenti at London-based investment banks were somewhat less surprised. But do not expect them to shout about the monster whose rampant growth lined their pockets so handsomely. It all began in…

From spooks to quants

12 February 2009Articles, Comment, Risky FinanceGCHQ, Jim Simons, Renaissance Technologies, Risky FinanceNick Dunbar

Risky Finance 23 August 2007 The British cryptanalysts at Bletchley Park and at its postwar successor GCHQ would often face a dilemma. Their secret code-breaking techniques were sometimes fabulously successful, allowing decisions of critical military or policy importance to be made almost in real time. But being too obvious about this success would alert the…

A quant parable

12 February 2009Articlescredit derivatives, derivatives, quantitative analysisNick Dunbar

Risky Finance 27 November 2007 In the 12 months to July, Gordon Gekko was alive and well - running a fixed income business at a major bank. He was so busy scanning the CDO league tables and picking up awards at industry functions that he could no longer remember which of his many sports cars…

Flogging a dead black swan

12 February 2009Articlesblack swan events, CDOs, Credit Crunch, Nassim TalebNick Dunbar

Risky Finance 21 May 2008 Nassim Taleb's avian metaphor may have helped sell a lot of books. But when it comes to the credit crunch, it lets people off the hook. The time has come to shoot the black swan. If there is one image that for many characterises the modern financier brought low, it…

AIG, Dinallo and the Devil’s derivatives

12 February 2009ArticlesAIG, derivatives, Eliot Spitzer, Eric Dinallo, FSA, Martin SullivanNick Dunbar

29 October 2008 Risky finance:Â On January 18, 2008, the great and good from finance and politics mingled in an auditorium at New York University. There was New York's then governor Eliot Spitzer, along with his state senate and assembly supporters. The finance side included the leaders of New York's biggest financial institutions, led by…

A happy solution

12 February 2009ArticlesNick Dunbar

By Nicholas Dunbar 22 December 2008 Risky finance: Questions of risk and reward in finance tend to focus exclusively on money. It makes sense: the financial system uses money to measure the fuzzy hopes and fears of investors and entrepreneurs, and converts them into transactions at a mutually acceptable price. Naturally, the financial institutions at…

Gordon’s synthetic bad bank

12 February 2009ArticlesAsset Protection Scheme, CDOs, CDSs, Gordon Brown, UK TreasuryNick Dunbar

Risky Finance 20 January 2009 The UK Treasury says it has avoided setting up a 'bad bank' to buy up toxic or hard-to-value assets from banks. Instead it has come up with the asset protection scheme (APS), an insurance mechanism intended to jump start the UK's moribund loan markets without the need to bulk up…

Money, science and happiness

18 December 2008ArticlesNick Dunbar

Welcome to nickdunbar.net. Many of you will know me from my previous life at Risk and Life & Pensions magazines, or my previous book Inventing Money. Some of you will have heard about my forthcoming book that I am currently writing. If you know nothing about me, here's a brief bio. I created this website…

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