Subscribe to this blog's feedSean Park has an idea for a new market - completion risk for large projects:
Building work on the stadium is set to begin up to three months ahead of schedule in April or May, with completion in 2011 to allow for test events, the Olympic Delivery Authority (ODA) said.
I suspect that if you had a market in construction cost and completion date, both would go bid very quickly at £496m and May 2011…and it would be a good bet... It is unlikely that they have accounted for things outside those which have historically contributed to delays and cost overruns. Indeed, there is no way of “scientifically” accounting for these possibilities, and I further suspect if they were to add an arbitrary 50% or more haircut to at least provision for some unknown eventuality, they would never be allowed to do so (by the customer, the accountants, the insurers, etc.) However if there was a traded market price any interested party would be able to hedge this risk...
The question is, though, who are the natural customers? Contractors don't have to worry if a large public project goes over budget - the overrun just gets handed on to the taxpayers. (Certainly does in defence procurement.) And in any case, I doubt the market would be deep enough to absorb it.
The delay market seems more suitable - there will be lots of smaller players with possible exposure to a delay. But who's going to take the other side? Who's exposed to the risk of a project finishing early? Individual contract workers, who will be out of a job?
Michael Lewis, writing at Bloomberg, piles on to Stan O'Neal:
In the six weeks between Aug. 12 and Sept. 30, as Merrill Lynch's losses mounted, its CEO didn't merely manage to play 20 rounds of golf, on four different courses. He played them beautifully, with a consistency that defied the pain he must have been feeling. Indeed, a glance at the scores explains why the Merrill Lynch board agreed to pay him $48 million in 2006: The man has ice water in his veins. From the end of July to early October, when the firm Stan O'Neal ran was losing money at a rate of more than $100 million a day, his handicap wavered only slightly -- in fact dropped, to 9.1 from 10.2... As he motored along empty cart paths and strolled down empty fairways, pausing every few minutes to whack away at his dimpled white ball, what exactly was Stan O' Neal thinking?...
Mark Thoma writes a short but extremely thought-provoking post:
Think these are mutually exclusive?* Bernanke warns on risks of higher inflation, Financial Times
* Fed Chairman Says Economy Likely to Slow, NY TimesThe Fed did say the inflation and recession risks were balanced after its last rate setting meeting. We are currently experiencing both negative demand shocks (through housing) and negative supply shocks (through oil prices) of uncertain duration and magnitude. While these both tend to slow output, they have different effects on inflation and call for different policy responses. Fun times at the Fed.
Stagflation, anyone?
And one for the quants: Has Nassim Taleb Killed Black-Scholes?
Two questions, finally, to spoil everyone's weekends:
1) How big a writedown is Barclays going to announce?
and
2) how soon till oil hits $100?
