Archive for March 2008

Favorite commentary on JP Morgan and Bear Stearns

March 18, 2008

Heard on the teevee, in passing: “The Yankees paid more for Alex Rodgriguez than Morgan paid for Bear Stearns.”

Today Bear’s shares are trading for more than Morgan’s offer—the debt holders must want some bargaining power… (from Felix Salmon)


They are worried about a ‘liquidity trap’

March 16, 2008

Economics Blog : Fed Invokes Depression-Era Law for Bear Loan

Key sentence:

Officials said while the loan is being made via J.P. Morgan Chase, the risk is being borne by the Fed. That means if Bear Stearns fails and the collateral is insufficient to repay the loan, the Fed would incur a loss.

This only makes sense (to me) if the Fed thinks that the underlying assets are good, but that the market is over-reacting so that the Fed needs to break a panic.

Here is a relevant paper:
Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?


The classical doctrine of the Lender of Last Resort (LOLR), elaborated by Bagehot (1873), asserts that the central bank should lend to “illiquid but solvent” banks under certain conditions. Several authors have argued that this view is now obsolete: in modern interbank markets, a solvent bank cannot be illiquid. This paper provides a possible theoretical foundation for rescuing Bagehot’s view. Our theory does not rely on the multiplicity of equilibria that arises in classical models of bank runs. We built a model of banks’ liquidity crises that possesses a unique Bayesian equilibrium. In this equilibrium, there is a positive probability that a solvent bank cannot find liquidity assistance in the market. We derive policy implications about bank-ing regulation (solvency and liquidity ratios) and interventions of the Lender of Last Resort. Furthermore, we find that public (bailout) and private (bail-in) involvement are complementary in implementing the incentive efficient solution and that Bagehot’s Lender of Last Resort facility must work together with institutions providing prompt corrective action and orderly failure resolution. Finally, we derive similar implications for an International Lender of Last Resort (ILOLR). (JEL: G21, G28) Copyright (c) 2004 by the European Economic Association.

Deal done:
JPMorgan closes deal on Bear Stearns – Yahoo! News

Why it is hard to detect people shooting for the ‘Black Swan’

March 16, 2008

Here, the ‘Black Swan’ will kill the fund. With probability one, for a long enough horizon.

If you were betting on the ‘Black Swan’ by doing the opposite, you would bleed capital for a long time.

Econbrowser: Hedge fund risk

We went through a Flat Stanley phase at home

March 8, 2008

LAist: Flat Stanley Does Hollywood is pretty neat.

The father of Pinyin

March 5, 2008

Video: Helping China learn to read | World news |

End times

March 4, 2008

are now pretty close for aged relative. It is happening at my house, and the emergency room. I am not sure how L. is going to react: tonight was pretty rough, as aged relative is now mumbling about how death is coming, how she wants it to come, and how life was meaningless.

I can only hope that we can provide a calming environment for the next step to happen. And a way for my wife to get through it all.


March 3, 2008

The Canadian Press: Despite long battle with cancer, Jeff Healey’s death still shocking, bandmate