Swaps

Jefferson County AL prepares to exit bankruptcy.

1. Since the depths of the financial crisis in 2008,  I have felt compelled to track the story of Jefferson County. Perhaps it “smelled” from the start, after all securities were sold to finance the construction of a sewer system!  Its latest exit plan is here. Along the same lines,a story about vulture hedge funds circling other municipal carcasses (here).

2. A colleague sent along this video link on asset pricing (here). It is in the spirit of macro videos I have posted before talking about the Bernank.

3. Vanity Fair does its periodic story of financial shenanigans.  Every one that I have read has been worth its time, several are in various places on this site. This one (saved here), talks about SAC Capital, one of the most successful hedge funds ever and fleshes out what happens in this business more often than not. Shades of Galleon, Gupta and Guiliani!

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The Co-Co Mortgage

With mortgages, prices rise => people have more equity => can trade-up => borrow more and it accelerates.  Also reverses on the downside (as we have seen with the crisis.) So, can one create a system where repayment accelerates when prices rise (to slow down the accelerator effect). i.e. structure the mortgage so that as prices rise people pay down more off the debt with the extra equity rather than buying SUVs? Similar idea as the symmetric bond scheme in Denmark.

In general. co-co bonds make me wonder.  If one thinks of contingent capital as debt that converts to equity if a bank’s equity capital cushion falls below a threshold, then the bondholders become shareholders at a time when it is bad to become one (a shareholder). And the bond’s price should reflect this risk.

FT alphaville

C0-Co Nuts

Tett FT Column 11-09