...this prompted by the rather startling news that a sizeable proportion of funds and institutions investing in structured products had no idea what they were doing. (Original survey here).

According to the results, 40% of mainstream fund managers surveyed said they had bought products for which they had no framework to assess risk.

Meanwhile, 20% of mainstream fund managers admitted to having no in-house specialist with relevant experience of the derivatives or structured products in which they invested. Among institutional investors who invested in derivatives or structured products, the figure was even higher, at 32%.

Talking of incentives (which we were - see Rob Davies' article here), this is an excerpt from a long account of the fall of Bear Stearns, betraying, Brad DeLong points out, just how obsessed some CEOs can get with hitting the quarterlies:

Cayne took the news peacefully. He resigned as C.E.O. on January 8, but remained chairman of the board. Schwartz was named the new C.E.O. His immediate priority was making sure Bear posted a profit in its current quarter, which ended February 29.

I do not know what is more unbelievable:

* That somebody who takes over halfway through a quarter thinks that his "immediate priority" as CEO should be to make it so that the business shows a profit that very quarter.
* That somebody who takes over halfway through a quarter thinks that he can make decisions as CEO that affect whether the business shows a profit that very quarter.
* That somebody who takes over as CEO in the middle of a financial crisis thinks that it is constructive for him to send an immediate signal that driving a wedge between actual fundamentals and reported financial results is a good business to be in.
* That any senior executive for any financial firm thinks that one-quarter financial results will materially impact market expectations of whether his organization is overleveraged--hence vulnerable to a liquidity problem.

Via Reuters and Financial News, a possible merger between GFI and Tullett Prebon - set to close within days, or so they say.
An earlier attempt at a merger fell apart in November last year after Tullett reportedly demanded a premium to its share price.
Since then GFI has seen a sharp fall in its share price. Ignore the $94.24 figure in the FT story; it's misleading because GFI had a four-for-one stock split in March this year. Like for like, on November 19, when the deal fell through, GFI was at $23.53, and now it's at $10.55; meanwhile, Tullett has stayed pretty well the same - 457p today, 459p last November. (Figures from Bloomberg). Which makes that unspecified premium look like rather a good deal for GFI.

At first sight the business resembles a thriving pottery. In a dusty courtyard women mould clay and water into hundreds of little platters and lay them out to harden under the Caribbean sun.

The craftsmanship is rough and the finished products are uneven. But customers do not object. This is Cité Soleil, Haiti's most notorious slum, and these platters are not to hold food. They are food.

Brittle and gritty - and as revolting as they sound - these are "mud cakes". For years they have been consumed by impoverished pregnant women seeking calcium, a risky and medically unproven supplement, but now the cakes have become a staple for entire families.

It is not for the taste and nutrition - smidgins of salt and margarine do not disguise what is essentially dirt, and the Guardian can testify that the aftertaste lingers - but because they are the cheapest and increasingly only way to fill bellies.

"It stops the hunger," said Marie-Carmelle Baptiste, 35, a producer, eyeing up her stock laid out in rows. She did not embroider their appeal. "You eat them when you have to."

Haiti: Mud cakes become staple diet as cost of food soars beyond a family's reach

The US government prepares for the Fannie Mae/Freddie Mac rescue (which will only cost $25 billion, honest) by raising its permitted debt ceiling by $800 billion to $10.6 trillion. (via Alea)
To put that figure in context: the GSEs own or guarantee around $6 trillion in US mortgages; the law also included a $300 billion fund to help distressed borrowers restructure their mortgages.

The city of Los Angeles is suing the major monoline insurers "for allegedly conspiring to maintain a credit-rating system that led local governments to buy ``unnecessary'' policies on their bonds". The linked Bloomberg article doesn't explain the issue well at all, but I looked at the issue back in March, and a certain degree of fury, if not actual litigation, seems to be justified.

Glee at the FIA - the industry lobby group modestly accepts the credit for stopping the Stop Excessive Energy Speculation Act of 2008 (this is really the bill's name). The bill ran out of momentum in the Senate and has been shelved for the summer.
The bill suffers (or rather suffered) from the customary Washington confusion between spot and futures markets.
Better information available from James Hamilton:

WaMu - looking unusually ugly even by mortgage lender standards, and possibly facing a bank run, Bloomberg says? WaMu denies it.

UBS - sued by Andrew Cuomo for fraudulent sales of auction rate securities. It's not been a good few months for UBS. It keeps losing money(through its own fault, it admits), it's already being sued in Massachusetts, and then there's the tax evasion thing.

And there's speculation about JP Morgan leading a breakup of HBOS. That last via Yves Smith, who also rounds up the latest total writedown estimates.

Satyajit Das discusses the prospect of a US default in this two-part essay (part 1, part 2) - and makes several interesting points:

...apparently you can pick out all the walnut whirls and just leave the strawberry liqueurs.

Bank of America, which bought Countrywide, is confident that it will add to the bottom line straight away.

...Despite racking up a $2.33 billion loss for the second quarter, the bank insists Countrywide "immediately adds to Bank of America profit," and is expective to be accretive by the end of 2008.

Vagueness (if there is such a word) surrounds Fannie Mae and Freddie Mac; how much is the bailout going to cost? Depends. It's going into the budget at $25 billion, but that's really just a think-of-a number:

officials conceded that there was no way of really knowing what, if anything, a bailout would cost.
The budget office said there was a better than even chance that the rescue package would not be needed before the end of 2009 and would not cost taxpayers any money. But the office also estimated a 5 percent chance that the mortgage companies, Fannie Mae and Freddie Mac, could lose $100 billion, which would cost taxpayers far more than $25 billion...

Perhaps someone should have a look at the accounts.

... is still falling, it seems - with news of massive writedowns at Merrill Lynch and Citigroup, and no one very keen on buying into Barclays or HBOS. Or, for that matter, Cheyne.

Not much hope of an improvement soon, either- according to the San Francisco Fed.

There must be some good news somewhere...

Paul Krugman points out that the TED spread, the measure of interbank suspicion and distrust, is rising - fast. We could well be in for a fourth peak - the first three were in August 07, December 07 and March this year, all fairly lively times in the markets.

The IndyMac bank run continues in California: it all sounds fairly calm and under control, so well done to the FDIC and the local authorities (from the Orange County Register, via CR):

IndyMac customers across Orange County finally were getting help with their accounts Monday after the bank reopened for the first time since it was taken over by federal regulators Friday.
It was slow-going, however, as the branches limited access to 10 or 12 customers at a time, with as many as 200 people in line. At some branches it was taking an hour or more for those admitted to complete their business...

And this pair of pictures is a good synecdoche for the property bubble: four years ago, people in California were queueing overnight to buy newly-built houses; now they're queueing to get their money out of collapsing banks.

However, the OCR article finished with this slightly worrying observation:

Meanwhile a forest of multi-colored umbrellas popped up along the sidewalk as other customers in line sought shelter from the heat and humidity. Others improvised using books, newspapers and scavenged cardboard for shade. An FDIC official walked down the line answering questions as he could...
Later a woman from Washington Mutual came by handing out water bottles -- and business cards.

Ahem.

Via Brad DeLong, this interesting point from the WSJ:

The Federal Reserve Act’s Section 13(13), created in 1933 and amended in the late 1960s, allows the Fed to lend to any individual, partnership or corporation with collateral backed by U.S. government securities or securities issued by federal agencies. Fannie Mae and Freddie Mac debt is generally included in that latter category of safe holdings, even though it’s not directly guaranteed by the U.S. government.

Now that the GSEs are going to be approaching the Fed for funding, they'll need collateral; but presumably they can't offer their own debt as collateral! Does this mean that the Fed won't be accepting GSE debt from anyone else as collateral either?

"Apocalypse" and "revelation" mean the same thing - one in Greek, one in Latin, both come from root words meaning 'unveiling', the idea that, as a poker player would put it, it's time to show what you've got. For forty years the US residential mortgage market has puttered along in a state of productive uncertainty, underpinned by the quasi-socialist bedrock of the government-sponsored entities, Fannie Mae and Freddie Mac - which benefitted from an implicit, unwritten US government guarantee.

The FT has a scoop: CDO issuance has dropped this year. Dropped quite a bit, apparently. I wonder if there's some bigger story here?

(links from Calculated Risk...) The GSEs are technically insolvent, Bloomberg says. Are they going to fail? No, Fortune says - they've got implicit guarantees.
In that case, why doesn't the market believe them? GSE CDS are trading at levels more suited to A2-rated companies than the AAA ratings that both still have.
Ed Kim reasons that therefore
either the market doesn't expect the guarantee to be upheld, which implies shocking things for the housing market (as the Fortune article points out);
or the market expects the guarantee to be upheld, but the US government has such a huge deficit that it won't be able to bail them out - effectively, that the US government itself should also be downgraded to A2, which implies shocking things for, well, everybody.

The SEC report on the rating agencies' failures in the RMBS markets is now out. (Original document here)
It's entertaining to read excerpts from the millions of internal emails seized by the SEC from the agencies, and gain an insight into how the agencies were working at the height of the structured credit craze.

They range from the surreal...

On Risk News today, the World Bank's latest foray into climate derivatives:

The World Bank will close a weather derivatives trade by October 1 intended to hedge the Malawian government against the financial risk of severe or catastrophic drought.

The pilot trade, of approximately $3 million in notional size, is expected to be the first in a series intermediated by the institution aimed at hedging developing countries against weather risk. Indicative prices for the transaction are being gathered from market participants, and the World Bank intends to finalise it by the end of the month.

It will be part-financed by the UK Department for International Development.

The trade will be linked to an index based on the average daily rainfall between October and April across 23 individual weather stations in Malawi. The so-called water requirement satisfaction index will be weighted with a bias towards regions that are more important for producing maize, which is the country’s staple crop...

Interesting, in this context, is this paper on the link between rainfall and civil war (via economic growth) in sub-Saharan Africa. If it works, the WB scheme could do more than simply make fundraising easier.

The US lender is in deep trouble, it announced today. But this CJR report (via Salmon) makes the case that Indymac's troubles are largely due to a short-sighted approach that pushed it into predatory lending, targeting the weakest and least sophisticated lenders it could find; some of the examples given, from continuing borrower lawsuits against the company, are deeply depressing.

The Financial Times today has a long feature about restricting commodity speculation, which starts off with the little-known story of the 1958 Chicago Onion Ring.

That sounds familiar.

Over the weekend, someone at Bridgewater Associates leaked the results of a study on the credit crisis to a Swiss paper- headline figure is total losses of $1.6 trillion. The original article in German is here.
Also, a startling report from another Swiss paper (English summary here) - new capital requirement rules including a leverage limit from the federal bank regulator, the EBK, could (according to one Swiss MP) mean that UBS and Credit Suisse have to raise massive additional amounts of capital - SFr 40 billion for UBS and SFr 30 billion for Credit Suisse. UBS, which said only last week it had no plans to raise more capital, dismissed the proposal as "a bit of a joke" when I spoke to them today. Nothing's definite until autumn, when the EBK announces its formal proposal.
It goes without saying that this would be catastrophic for the banks - UBS' market cap at present is only SFr 56 billion and Credit Suisse is at SFr 45 billion.

Three interesting articles for the weekend, all more or less about the speculation issue.

First of all, this document published for the G8 summit in Tokyo. Key quote:

Prices have risen due to a number of individual factors, whose combined effect has led to an upward price spiral. Underlying structural factors contributing to rising food grain prices include high energy and fertilizer prices; the continuing depreciation of the US dollar; sharply increased use of both cereals and vegetable oils in bio-fuel production; and declining global stocks of food grains due to changes to buffer stock policies in the US and the European Union. Back-to back droughts in Australia, and growing global demand for grains (excluding for bio-fuel production) have been modest contributors and on their own would not have led to large price increases. Commodity investors and hedge fund activity also seem to have played a minor role. Although empirical evidence is scarce, the prevailing consensus among market analysts is that fundamentals and policy decisions are the key drivers of food price rises, rather than speculative activity.

The FT interviews Barclays Capital's head of commodity research, Paul Horsnell - this caught my eye:

Paul Horsnell: ... Last year there were many who put higher oil prices down to too much liquidity in the world system which was leading to too much risk-taking and too much speculative involvement in oil.
It is impossible to maintain that view this year...

Seems the speculators can't win. (Isn't it interesting how all the bullish speculators seem to restrict themselves to driving oil up and all the bearish ones are devoted to driving equities down?)

Doubt over whether Lehman's deleveraging is really all it seems in this interesting Bloomberg article (via Yves Smith):

So what does Lehman do? It sells billions of dollars of assets to a newly formed hedge fund [R3] that:
1) counts Lehman as a significant investor;
2) is run by seven recently departed Lehman executives;
3) is operating out of Lehman's office space, three floors down from the office of Lehman's corporate secretary.
You don't need to know much more about Lehman's transactions with the fund, R3 Capital Partners, to see the problem...