While You Were Working - June 26

Well … Duh!

The least surprising story of the day is how the iTraxx senior financials index shows European banks are being viewed by traders as safer than at any point since the 2011 eurozone debt crisis. The rather obvious reason is the taxpayer bailout of Veneto Banca and Banca Popolare di Vicenza officials in Rome orchestrated over the weekend.

The bailout protected senior bondholders while putting taxpayers on the hook for up to €17 billion. A move like that rather obviously sends the signal to traders that senior bondholders still enjoy a government backstop. Why wouldn’t traders deem senior bank debt safe?

Speaking of bank bailouts

Stephen J. Lubben, a corporate governance and bankruptcy expert from Seton Hall Law School, penned a rather detailed explanation of why the move being weighed by policymakers to get rid of the orderly liquidation authority (OLA) makes little sense. The OLA is part of Dodd-Frank, which in some circles makes it inherently bad. However, a man who does not exist in one of those circles is former Treasury Secretary Hank Paulson. Paulson, a Republican, has stated time and again that one tool he wished he had at his disposal during the height of the crisis (I presume right next to his bazooka) was the authority to liquidate a big Wall Street firm like Lehman Brothers in an orderly fashion. Hence, the orderly liquidation authority was born. It kinda makes you wonder why Paulson isn’t playing a more vocal role right now in making sure the OLA remains alive for his successors to use.

Collateral, like health insurance, is all about accessibility

BNY Mellon and PwC collaborated on this research into funding stress and the inaccessibility of collateral in OTC derivatives markets. Turns out the combination of regulations on financial institutions related to OTC trades and balance-sheet constraints at bank counterparties is having a profound impact on the market. The study, which includes insight from senior buy-side executives from over 120 global firms, features this nugget:

"A major concern among many buy-side firms is not so much a lack of collateral in the system but rather the inaccessibility of this collateral."

Strang timing for a sentence like that. With all the buzz this week around possible health care-related votes on Captiol Hill and today's release of the Congressional Budget Office's score on the latest proposal, one of the key elements of any health care system might get lost in the partisan noise. A major concern for some peope is not so much the lack of insurance options in the system but rather the inaccessibility of insurance because it costs too much.

Ethereum delirium at a 6-year-old birthday party

I attended the birthday party for my friend’s 6-year-old last Saturday and amid all the chaos that ensues when an epic bouncy house slip-and-slide is in play, I got to chatting with one of the other dads. When he got done bragging about what he does (see the last WYWW Appetizer below), I told him what I do. He immediately asked me about bitcoin. He was desperate to learn all the ins and outs of virtual currency. I tried to explain to him that in my line of work, the underlying technology of bitcoin (blockchainitis!) was the really interesting bit, rather than the currency. Nevertheless, he kept asking me about bitcoin, ethereum, etc.

I could tell this guy was pondering piling loads of his time and money into such currencies, so I eventually told him he should probably stick to doing so with his discretionary income rather than his life savings. When he asked me why, I simply replied, “Virtual currencies are like commodities in that they trade up and down, except there is one big difference: There is no there there. You can’t really buy much of anything with them and you certainly can’t cash in and put the coins under your mattress when the zombies invade.”

I am still not sure I convinced him, but I couldn’t help but think of that conversation when a fake news story about the car-crash death of ethereum inventor Vitalik Buterin deleted $4 billion in Ethereum’s market value. If you can get past the linguistic gymnastics of a “currency” having a “market value,” then it is interesting to talk about how the news hoax actually might make ethereum seem more like a legitimate thing. After all, if news hit the wires about the sudden death of Janet Yellen, Mark Carney or Mario Draghi, don’t you think the currencies they respectively govern would take a hit? I think they would. That makes them similar to ethereum in at least one respect. But then again, those currencies would eventually rebound because there is a whole lot of there there when it comes to the dollar, the pound and the euro. I am not so sure about ethereum.

WYWW Appetizers