Jan 27, 2012

The MF Global fallout and other links

  • I am surprised the markets shrugged off the MF Global loss of client funds so easily.  I am hopeful that the end result will be tighter restrictions to prevent such losses in the future.  Until this happens though I would have thought risk premiums might need to widen generally or a least some other brokers might suffer as customers gravitated towards the strongest.
  • A retrospective on housing market declines that looks at where Australia might be in that process.  Real estate still seems expensive in Australia and with China likely to be shoring up its economic growth this year, I don't think AUD interest rates will be adding price support to housing.
  • A study that looked back at asset backed securities and their ratings histories found that the securities included in CDOs later experienced worse ratings downgrades.   The conclusion implied that CDO sponsors were exploiting some kind of information advantage to skew the results that the buyers experienced.  This was the case even when controlling for yield which is where I would normally expect default expectations to be priced.  The authors looked at the entire asset-backed universe but CDOs were concentrated in the housing and commercial real estate sector.  I may have missed where the ABS sector was controlled for but if it was not controlled for I could see how warped investor demand for housing CDOs led to warped housing prices and ultimately very poor performance of housing ABS without needing asymmetric information between CDO sponsors and buyers.  I don't know what really happened of course, but the explanation from the authors seems like an elaborate and difficult application of exceptionally good ex-ante judgement.  Such good judgement is both valuable and rare so it is best applied with simpler strategies and fewer moving parts to depend on.

No comments:

Post a Comment