I know this is not totally blog-like but I often refine posts in comments rather than in subsequent posts. So if you have not visited this site recently, it might be worth checking on comments... For example, I recently extended the discussion on the on-going correction of the employee compensation in financial services (a hit of this site).

Given the apocalyptic correction in market capitalisation (valuation) of banks, I relay here a remark I found pertinent during a debate of the SII:

  • It is now clear the market finds difficult to value CDOs (collateralized debt obligation, introduced in a previous post (fr)), i.e. a tranche of a pool of assets subject to a matching pool of liabilities... Liquidity has been virtually null for months now, huge discounts and marked-downs have been seen; the market basically acknowledges that the dependency between liabilities is not understood;
  • what is a bank? It is on one side a pool of assets (capital, deposits...) and on another side a pool of liabilities (guarantees, financial products, loans...). Shareholders own a tranche of the assets (the most junior, unless they hold preference shares);
  • hence, virtually, bank shareholders hold a junior (or mezzanine) tranche of a CDO. Is it now surprising that share prices of banks collapse? Or that the (junior) share price does not really rebound when (mezzanine) capital is injected by tax-payers (as preference shares, so the equity shareholders remain the first in line for a loss in capital)?