FT Alphaville has been a long time daily read for me but as of May 2021, I have not read the blog as I have car camped around the good o’ US of A. This is some notes as I skim and catchup a backlog of posts:
- Tell me lies, tell me sweet little VIEs: Wall Street finds out about known unknowns – Variable interest entities seem like a nice case study in LPE point that states create markets and set rules of the game. And can change them! Nice complement to Matt Levine piece on how derivatives could interplay with this development. Maybe derivatives are virtual private statecraft?
2. Snap AV: the broad growth trade takes hold – Top 5 contributing stocks by year chart is bonkers with 2020 jump (12% of SPX returns) and YTD relative decline (4% of SPX).
3. Record Skew index shows nagging investor nerves on US stocks rally – Skew is at all-time highs. Calls often have lower implied volatility than than their symmetrical dollar amount puts. At Matt Levine explained once, there is a conditional explanation. On the way up companies become bigger and more stable. On the way down they become smaller and more risky. There is also a structural explanation in that more people are buying downside protection with puts and selling calls to get a bit of extra yield. “Implied volatility of a stock option generally goes up as the strike price goes down.” Though skew is up in traditional measures, meme stocks are also breaking the dynamics of the two above explanations.
4. Did FT Alphaville unwittingly fuel the GameStop madness? – looks that way!
5.1 Libor’s US replacements: no one rate to rule them all – a nice overview of the developments to replace LIBOR in USD capital markers… “a chicken and egg problem”; But, as Schopenhauer says, the truth grows in three stages: first, it’s ridiculed; the second, it is violently opposed; the third, it’s accepted as self-evident
When you think about it as much as we have had to, it begins to strike you as bizarre that pretty much all the floating rate contracts all over the world were underpinned by one rate put together on the back of guesswork by a dozen or so people every morning in skyscrapers in the Square Mile and Canary Wharf. It’s a bit like having one stock index for the world. Or one oil price. With neither based on actual transactions.
Having one rate to rule them all made life simpler. It made markets more efficient too. What we are confronted with now is more complex, but also more reflective of how finance actually works. If we want to avoid ending up here again decades from now, it may well be that there is no choice but choice.
5.2 And: Officials at the state and federal level are writing fallbacks for some of the thorniest Libor-linked contracts into law. They might be inadequate.
5.3 And: The bank rate is emerging as a fix for firms without big treasury operations.
5.4 And: UK regulators are wading into the US’s Libor transition; NOTE: obvious but good reminder that credit risk is related to (and just it?) term risk
6 Chime ProPublica article from further reading – Chime, a “neobank” serving millions, is racking up complaints from users who can’t access their cash. The company says it’s cracking down on an “extraordinary surge” in fraudulent deposits. – security / access paradox.
Chime, which provides app-based banking services to an estimated 12 million customers, has according to experts been generating a high rate of complaints, with 920 filed at the Consumer Financial Protection Bureau since April 15, 2020… By comparison, Wells Fargo, a bank with six times as many customers and a lengthy recent history of misbehavior in its consumer bank, has 317 CFPB complaints tagged for closed accounts over the same time period. Marcus, the new online bank created by Goldman Sachs, with 4 million customers, has generated seven such complaints.
Chime portrayed the customer complaints as largely driven by the company’s attempts to crack down on accounts that use fraudulently obtained unemployment insurance or federal stimulus payments.
(security/access paradox – I can easily imagine a story saying VC backed neobank facilitates UI fraud)
For all of Chime’s Silicon Valley tech patina, one thing it’s not is an actual bank. Like others in its category, Chime is a digital interface that hands over the actual banking to, in this instance, two regional institutions, The Bancorp Bank and Stride Bank. Chime customers interact with the Chime app, but Bancorp and Stride, both of which are FDIC-insured, hold their money.
“They’re primarily regulated as a vendor to the existing bank, because banks are required to manage their vendors and they’re responsible for third-party relationships. But it’s still a step removed.”