Further assorted links

by on March 30, 2010 at 10:28 am in Web/Tech | Permalink

1 beamish March 30, 2010 at 10:47 am

My favorite philosophy graffito was written above the latch of a stall in the philosophy building at Stanford. It was ‘John Locke’.

2 Monte Davis March 30, 2010 at 11:04 am
3 Levi Stahl March 30, 2010 at 11:47 am

University of Chicago alum Quinn Dombrowski recently self-published a book of all the graffiti she found in the Regenstein Library; the Chicago Tribune ran a story about it last week.

4 MyTyrone March 30, 2010 at 2:38 pm

I usually do like statments like this in periodicals for non economists:

Close to one in four mortgages are underwater

Because many people will assume that one in 4 homes is underwater.

5 Ren March 30, 2010 at 4:32 pm

Appreciate the Atwood link. She is such a gem.

Can I just echo her comment that virtuous and/or bird-loving coffee drinkers should be drinking shade grown coffee? That message does not seem to be completely out there and it is, according to many, one of THE most effective small choices you can make. Caribou is one of the few chain brewed coffee sellers to occasionally offer shade grown.

6 q March 30, 2010 at 7:15 pm

I love how the picture in the karaoke story is a group of white people at an Asian karaoke lounge, when anyone familiar at all with the karaoke culture knows it is almost always Asians who frequent such places.

Catering to the readership, I guess?

7 ck March 30, 2010 at 11:23 pm

Why do girls need two hands to pee? Have I been doing it wrong?

8 Chris Janak March 31, 2010 at 1:25 pm

RE: Clearing Houses/Margining

– Clearing/Margining does not remove risk, but rather transforms credit risk into liquidity risk and/or market risk.
– For many companies, credit risk is less volatile and easier to manage than liquidity risk
– Credit risk is almost always preferable to market risk

A key point is that forcing clearing/margining does not remove risk, rather it transforms risk. In particular, you are transforming credit risk into liquidity risk (in this case, the risk that a company cannot meet the required margin calls). To the extent that liquidity risk leads to less hedging, you may also transform credit risk into market risk (a terrible outcome, by the way).

Take energy utilities as an example. They commonly use basic derivatives (esp. fixed-float swaps) to hedge their portfolio (which helps keeps rates stable for customers and earnings stable for investors). Most of this is OTC. There are hundreds of counterparties to choose from, making credit risk relatively easy to manage simply through diversification. Some utilities augment diversification with margining, but not all. Those that do so generally margin based on collateral thresholds… meaning margin is only posted beyond certain predefined limits (as opposed to an exchange with margins for the full value of the forward contract plus some additional). In any case, each utility uses margining to the degree that it feels appropriate.

Now let’s say you force all these utilities to post margin for 100% of the value of their derivative hedges. In contrast to credit risk, liquidity risk is hard for your average utility to manage via diversification, because the market hubs at which they transact tend to be highly correlated. So a utility that’s naturally short (a common position), will find that margins calls across all of its purchases are highly correlated, making it very volatile and relatively difficult to manage liquidity risks. Utilities will be forced to carry literally billions in extra liquidity to meet these potential margin calls or simply decided to hedge less. Note that hedging less exposes customers and rate payers to rate and earnings volatility, respectively.

Why do I say credit risk is preferable to market risk (from a hedger’s perspective)? If you don’t hedge, only one thing as to happen for you to lose money; prices move against you. If you hedge, two things have to happen for you lose money: prices move against you AND the counterparty fails to perform. So everything else equal, it is better to hedge†¦ even if you only option is a relatively un-creditworthy counterparty. [I’m assuming here, quite safely, that there is not a perfect positive correlation between counterparty default and changes in prices]

The pending legislation, while well meaning, doesn’t provide obvious benefit from my perspective, and may do quite a bit of harm. Essentially is assumes liquidity risk is preferable to credit risk, which may or may not be true. I can think of several energy companies that blew up due to mismanaged liquidity over the last 10 years. In contrast, I can’t think of one energy company that became insolvent primarily as a result of a credit loss. (I’m not saying this has never happened before (clearly it has), just that on average liquidity risk takes down more companies than credit risk losses).

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