Cash CDO Modelling in Excel A Step by Step Approach

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Cash CDO Modelling in Excel A Step by Step Approach
1st Edition Darren Smith Digital Instant Download
Author(s): Darren Smith, Pamela Winchie
ISBN(s): 9780470741573, 0470741570
Edition: 1
File Details: PDF, 14.71 MB
Year: 2010
Language: english
Contents

Cover

Half Title page

Title page

Copyright page

Dedication

Foreword

Acknowledgments

Chapter 1: Introduction

1.1 To Excel or Not to Excel?

1.2 Existing Tools and Software

Chapter 2: What are Cash CDOs?

2.1 Types of CDOs

2.2 Description of a Cash Flow CDO

2.3 Life Cycle of a Cash CDO

2.4 Contribution to the “Credit Crunch”

Chapter 3: Introduction to Modelling

2
3.1 Goals in Modelling

3.2 Modelling Philosophies and Trade-Offs

3.3 Flexibility

3.4 Organization and Layout of a Model

3.5 Life-Cycle Issues: Building an Adaptable Model

Chapter 4: Prerequisites to Cash Flow Modelling

4.1 Modelling Dates

4.2 Interest Rate Curve Modelling

4.3 Present Value Modelling

Chapter 5: Getting Started

5.1 Create the Input Sheet

5.2 The Value of Labelling

Chapter 6: Modelling Assets

6.1 Initial Asset Pool: Rep Line Modelling vs. Actual Assets

6.2 The Collateral Sheet in the Cash Flow Model

6.3 Modelling Defaults and Recoveries

6.4 Amortization

3
6.5 Modelling Reinvestment

6.6 Reinvestment Cohorts

6.7 Accounts

6.8 Timing Models vs. Actual Timing

6.9 Simple Warehouse Modelling

Chapter 7: Basic Waterfall Modelling

7.1 Basic Waterfalls

7.2 Layout and Design

7.3 Avoiding Negative Values

7.4 Timing Modelled vs. Actual Timing

7.5 Liabilities Cash Flows

7.6 Fees and Expenses Cash Flows

7.7 Interest Waterfall

7.8 Interest Waterfall (Available Funds After Payment)

7.9 Interest Waterfall Calculations

7.10 Principal Waterfall

7.11 Principal Waterfall (Available Funds After Payment)

4
7.12 Principal Waterfall Calculations

7.13 Adding Over-Collateralization Tests

7.14 Adding Interest Coverage Tests

7.15 Technical Issues with Coverage Tests

Chapter 8: Outputs Sheet

8.1 Purpose of the Outputs Sheet

8.2 Collating Waterfall Outputs

8.3 Present Value

8.4 Duration

8.5 Weighted Average Life and Internal Rate of Return

8.6 Equity Analysis

8.7 Basic Auditing

Chapter 9: Moody’s Rating Agency Methodology

9.1 Introduction to Agency Methodologies

9.2 The BET Approach

9.3 Evaluating the Collateral

9.4 Creating the Moody’s Sheet and Related References in the

Cash Flow Model

5
9.5 Default Profiles

9.6 Interest Rate Profiles

9.7 Running the Analysis

9.8 Variations on the BET

9.9 2009 Methodology Update

Chapter 10: Standard & Poor’s Rating Methodology

10.1 The S&P Approach

10.2 Evaluating the Collateral

10.3 Modelling Recovery Rates

10.4 CDO Evaluator

10.5 Default Rates

10.6 Interest Rate Stresses

10.7 Amortization

10.8 Additional S&P Modelling Criteria

10.9 Building the S&P Sheet and Related References

10.10 Running the Stress Scenarios

Chapter 11: Advanced Waterfall Modelling

6
11.1 Hedge Agreements

11.2 Fixed Notes

11.3 Variable Funding Notes

11.4 Liquidity Facilities

11.5 Interest Reserve Accounts

11.6 Other Structural Features

11.7 Combination Notes

11.8 Collateral Manager Equity Analysis

Chapter 12: Maintaining the Cash Flow Model

12.1 Adapting Your Model for Different Capital Structures

12.2 Audit Sheet

12.3 Debugging

Chapter 13: Advanced Structuring Issues

13.1 Projecting Accrued Interest

13.2 Collating Collateral Cash Flows

Chapter 14: Sourcing and Integrating Data From External

Systems

14.1 Data Requirements

7
14.2 Trustee Reports

14.3 Bloomberg

14.4 Loan Level Information Sources

Chapter 15: Regulatory Applications of CDO Technology

15.1 The Basel Accords

15.2 Regulatory Capital Requirements for CDO Notes

15.3 The Standardized Approach for CDOs

15.4 The Internal Ratings-Based Approach for CDOs

15.5 The Internal Ratings-Based Approach for CDOs: The

Ratings-Based Approach

15.6 The Internal Ratings-Based Approach for CDOs: The

Supervisory Formula Approach

15.7 The Internal Ratings-Based Approach: Liquidity

Facilities, Overlapping Exposures, Credit Risk Mitigation and
Early Amortization Features

15.8 Supervisory Provisions

15.9 Updates to Basel II

Chapter 16: CDO Valuation

16.1 Introduction

8
16.2 Basic Valuation Approaches

16.3 Traditional Underwriter Analysis

16.4 Fundamental Cash Flow Analysis

16.5 Using Rating Agency Models

16.6 Transition Matrices

16.7 Conclusion

Chapter 17: In Conclusion

Index

9
Cash CDO Modelling in Excel

10
For other titles in the Wiley Finance series please see
www.wiley.com/finance

11
12
This edition first published 2010
© 2010 John Wiley & Sons, Ltd

Registered office
John Wiley & Sons Ltd, The Atrium, Southern Gate,
Chichester, West Sussex, PO19 8SQ, United Kingdom

For details of our global editorial offices, for customer

services and for information about how to apply for
permission to reuse the copyright material in this book please
see our website at www.wiley.com.

The right of the author to be identified as the author of this

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Designs and Patents Act 1988.

All rights reserved. No part of this publication may be

reproduced, stored in a retrieval system, or transmitted, in any
form or by any means, electronic, mechanical, photocopying,
recording or otherwise, except as permitted by the UK
Copyright, Designs and Patents Act 1988, without the prior
permission of the publisher.

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13
Designations used by companies to distinguish their products
are often claimed as trademarks. All brand names and product
names used in this book are trade names, service marks,
trademarks or registered trademarks of their respective
owners. The publisher is not associated with any product or
vendor mentioned in this book. This publication is designed
to provide accurate and authoritative information in regard to
the subject matter covered. It is sold on the understanding that
the publisher is not engaged in rendering professional
services. If professional advice or other expert assistance is
required, the services of a competent professional should be
sought.

Library of Congress Cataloging-in-Publication Data

Smith, Darren.
Cash CDO modelling in Excel : a step by step approach /
Darren Smith and Pamela Winchie.
p. cm.
ISBN 978-0-470-74157-3
1. Collateralized debt obligations–Mathematical models. 2.
Credit derivatives–Mathematical models. 3. Microsoft Excel
(Computer file) I. Winchie, Pamela. II. Title.
HG6024.A3S566 2010
332.63′2–dc22

2010005595

A catalogue record for this book is available from the British

Library.

ISBN 978-0-470-74157-3

14
Dedicated in loving memory to Graham, Josie and Stephen

15
Foreword

The fixed income markets have always been centres of

innovation and creativity. This much is apparent from even a
cursory glance at developments in recent and not-so-recent
history. However it is only in the last thirty years or so that
such innovation has really been required, as economic
markets changed significantly and capital started to move
freely. The bond markets have been the conduit through
which vital capital has been raised; continuing product
development in the markets has made a significant, and
irreplaceable, contribution to global economic progress. The
range of products available is vast and always growing, as the
needs of both providers and users of capital continually alters
in response to changing conditions. This economic dynamic
means that market participants observe a state of constant
learning, as they must if they are to remain effective in their
work. Inevitably we are required to become specialists, as
each segment of the debt markets demands increasingly
complex approaches in addressing its problems and
requirements.

Of course, users of capital are not limited to existing products

for raising finance or hedging market risk exposure. They can
ask an investment bank to design an instrument specifically to
meet their individual requirements, and target it at specific
groups of customers. For example it is arguable whether the
growth of some of the so-called “credit-card banks” in the
United States could have occurred so rapidly without the
securitisation mechanism that enabled them to raise
lower-cost funding. Witness also the introduction of the
synthetic collateralised debt obligation (CDO), allied with a

16
credit derivative, following rapidly on the development of
more conventional CDO structures and designed to meet
purely credit risk management requirements. The increasing
depth and complexity of the markets requires participants to
be completely up-to-date on the latest analytical and valuation
techniques if they are not to risk being left behind. It is clear
that we operate in an environment in which there exists a
long-term interest in the application of ever more accurate
valuation and analytical techniques.

The arcane and specialist nature of the structured finance

markets means that as a topic they are rarely reviewed in the
mainstream media. This contributed to a great deal of
misunderstanding amongst legislators, journalists, the general
public and even some regulators in the wake of the financial
crash of 2007-2008. That “CDOs” were stated by some to
have been the cause of the crisis reflects the general level of
ignorance at all levels. This is unfortunate. To blame the crash
on financial engineering is akin to blaming cars for road
deaths. Legislation in the wake of a rise in road fatalities is
usually connected with making the roads safer, not banning
cars. Without a doubt, heavy losses on holdings of structured
credit securities were behind the trouble at some banks, but
amongst the high-profile bank failures were a number of
institutions that did not hold such assets, and had instead
neglected their liquidity management. The simple fact is that
securitisation and financial innovation have been a force for
much good in the world, particularly in an era of
globalisation. To take one example, one should know that the
mobile phone industry is a large user of capital markets
finance. To witness, as I have done, a rickshaw puller on the
streets of Dhaka, average salary $1 per day, using a mobile
phone is to observe the social benefits of a free market in

17
capital, technical innovation and financial engineering
coalescing in one exotic moment.

Speaking personally, I stress the importance of constantly

staying at the leading edge of financial market research and
development to ensure that, as bankers, we continue to deliver
quality and value to our clients. Much of the innovation and
product development in the markets originates from an
ongoing discussion with the client base, as banks seek to meet
their customer requirements.

That is why this book, from two experienced practitioners, is

such a welcome publication. It is a rare beast in the universe
of finance literature in actually telling one how to do
something, rather than being simply an academic treatise on
how one does things in a classroom. It is the authors’ clarity
of approach and focus that I~am most excited about. They
provide insight into practical techniques and applications used
in the structured finance markets today. The content also
sheds light on the scope and significance of these techniques
in the world of finance. I am impressed by the level of detail
herein on exactly how to go about building the cash flow
model, something that I believe would be of use to a wide
range of finance professionals, not just those concerned with
structuring CDO transactions.

Another feature about this book that I personally recommend

is its value for first-time practitioners. If one is working on an
asset-backed security (ABS) or CDO transaction at a bank
that has not previously closed such a deal, then this is a useful
reference to have on the desk. Post-credit crunch, many banks
that had not previously originated ABS deals sought to close
“in-house” transactions to create collateral for use at the

18
European Central Bank and Bank of England repo windows.
The contents of this book would be of great interest to such
bank practitioners. As such, this book deserves a wide
readership.

It is a privilege to be asked to write this foreword. The

authors have produced a work of the very highest quality. As
focused as it is comprehensive, this is an excellent
contribution to the literature and sure to become a key
reference work for anyone with an interest in the
securitisation and structured finance markets. My hope is that
this exciting and interesting new book spurs readers on to
their own research and investigation; if they follow the
application and dedication evident in this work, they will not
be going far wrong!

Professor Moorad Choudhry

Department of Economics
London Metropolitan University
30 March 2010

19
Acknowledgments

As we discovered along the way, a book is a team effort and

we have many people to thank for their contributions. These
include Geoff Chaplin and Moorad Choudhry for their
insight, encouragement and assistance in helping us to get this
book published. We would like to express our deep gratitude
to Francis Richard Pereira, Dacil Acosta and Simon Chantry
for being our guinea pigs. Richard is an Investment Actuary
specializing in Fixed Income and Alternative Investments.
Richard is highly regarded in this field and has worked for JP
Morgan as an Executive Director in the Structured Alternative
Investments business area. Dacil has worked as a CDO
structurer for Merrill Lynch and Dresdner. Prior to that, she
worked at Standard and Poor’s as a CDO Ratings Analyst.
Simon is a senior member of the Structured Credit team at
Sumitomo Mitsui Banking Corporation’s European business,
focusing mainly on balance sheet structures. Prior to that, he
also worked as a CDO Ratings Analyst at Standard and
Poor’s. All of the above people gave their personal time, and
their work on the book should not be construed as an
endorsement or recommendation from their employers past or
present.

Darren would also like to acknowledge the following people

who have helped and influenced him over the past 12 years:
Pat Gallaway, Mari Kawawa, Eddie Lee, Gerrard O’Connor
and Arturo Cifuentes.

Pamela would like to acknowledge the many people who

have helped and inspired her over the years, including Sandra
Kiss and The Honourable Mr Justice Morris Perozak.

20
Other documents randomly have
different content
 There is little merit in inventing a happy idea, or attractive
situation, so long as it is only the author’s voice which we hear. As a
being whom we have called into life by magic arts, as soon as it has
received existence, acts independently of the master’s impulse, so
the poet creates his persons, and then watches and relates what
they do and say. Such creation is poetry in the literal sense of the
term, and its possibility is an unfathomable enigma. The gushing
fullness of speech belongs to the poet, and it flows from the lips of
each of his magic beings in the thoughts and words peculiar to its
nature.
Niebuhr (Letters, &c., Vol. III, 196).

Poetry is not like reasoning, a power to be exerted according to

the determination of the will. A man cannot say, “I will compose
poetry.” The greatest poet even cannot say it; for the mind in
creation is as a fading coal, which some invisible influence, like an
inconstant wind, awakens to transitory brightness; this power arises
from within, like the colour of a flower which fades and changes as it
is developed, and the conscious portions of our nature are
unprophetic either of its approach or its departure. Could this
influence be durable in its original purity and force, it is impossible to
predict the greatness of the results; but, when composition begins,
inspiration is already on the decline, and the most glorious poetry
that has ever been communicated to the world is probably a feeble
shadow of the original conceptions of the poet.
Shelley (A Defence of Poetry).
 Who would loose,
Though full of pain, this intellectual being,
Those thoughts that wander through eternity,
To perish rather, swallowed up and lost
In the wide womb of uncreated night?

Milton (Paradise Lost ii., 146)

“Loose”—by committing suicide.

When the white block of marble shines so solid and so costly, who
remembers that it was once made up of decaying shell and rotting
bones and millions of dying insect-lives, pressed to ashes ere the
rare stone was?
(Chandos).

The madness that starves and is silent for an idea is an insanity,

scouted by the world and the gods. For it is an insanity unfruitful—
except to the future. And for the future, who cares—save those
madmen themselves?

... The gods that most of all have pity on man, the gods of the
Night and of the Grave.
 Our eyes are set to the light, but our feet are fixed in the mire.
(Folle-Farine).

“If the cucumber be bitter, throw it away,” says Antoninus: do the

same with a thought.... There is no cucumber so heavy that one
cannot throw it over some wall.
Ouida (Tricotrin).

Antoninus, 120-180 A.D., the Roman emperor and Stoic philosopher, usually
known by his first two names Marcus Aurelius, is the author of the well-known
Meditations. The quotation is from Bk. VIII., “The gourd is bitter; drop it, then!
There are brambles in the path; then turn aside! It is enough. Do not go on to
argue, Why pray have these things a place in the world?” etc.
These quotations from Ouida may serve to illustrate the saying of Pliny the
Elder, “No book is so bad but some good may be got out of it” (Pliny’s Letters, III.,
10)—a saying which was no doubt true until printing let loose on the world such a
multitude of worthless writers.

WHEN WE ALL ARE ASLEEP

When He returns, and finds the World so drear—
All sleeping,—young and old, unfair and fair,
Will He stoop down and whisper in each ear,
“Awaken!” or for pity’s sake forbear,—
Saying, “How shall I meet their frozen stare
Of wonder, and their eyes so full of fear?
How shall I comfort them in their despair,
If they cry out, ‘Too late! let us sleep here’?”
Perchance He will not wake us up, but when
He sees us look so happy in our rest,
Will murmur, “Poor dead women and dead men!
Dire was their doom, and weary was their quest.
Wherefore awake them into life again?
Let them sleep on untroubled—it is best.”

R. Buchanan.

CHORUS
Before the beginning of years
There came to the making of man
Time, with a gift of tears;
Grief, with a glass that ran;
Pleasure, with pain for leaven;
Summer, with flowers that fell;
Remembrance fallen from heaven,
And madness risen from hell;
Strength without hands to smite;
Love that endures for a breath;
Night, the shadow of light,
And life, the shadow of death.

And the high gods took in hand

Fire, and the falling of tears,
And a measure of sliding sand
From under the feet of the years;
And froth and drift of the sea;
And dust of the labouring earth;
And bodies of things to be
In the houses of death and of birth;
And wrought with weeping and laughter,
And fashioned with loathing and love,
With life before and after
And death beneath and above,
For a day and a night and a morrow,
That his strength might endure for a span
With travail and heavy sorrow,
The holy spirit of man.
From the winds of the north and the south
They gathered as unto strife;
They breathed upon his mouth,
They filled his body with life;
Eyesight and speech they wrought
For the veils of the soul therein,
A ti f l b d th ht
 A time for labour and thought,
A time to serve and to sin;
They gave him light in his ways,
And love, and a space for delight,
And beauty and length of days,
And night, and sleep in the night.
His speech is a burning fire;
With his lips he travaileth;
In his heart is a blind desire,
In his eyes foreknowledge of death;
He weaves, and is clothed with derision;
Sows, and he shall not reap;
His life is a watch or a vision
Between a sleep and a sleep.

Swinburne (Atalanta in Calydon).

She (the ship of Odysseus) came to the limits of the world, to the
deep flowing Oceanus. There is the land and the city of the
Cimmerians, shrouded in mist and cloud, and never does the shining
sun look down on them with his rays, neither when he climbs up the
starry heavens, nor when again he turns earthward from the
firmament, but deadly night is outspread over miserable mortals.
Thither we came and ran the ship ashore and took out the sheep;
but for our part we held on our way along the stream of Oceanus, till
we came to the place which Circe had declared to us.
There Perimedes and Eurylochus held the victims, but I drew my
sharp sword from my thigh, and dug a pit, as it were a cubit in
length and breadth, and about it poured a drink-offering to all the
dead, first with mead and thereafter with sweet wine and for the
third time with water.... When I had besought the tribes of the dead
with vows and prayers, I took the sheep and cut their throats over
the trench, and the dark blood flowed forth, and lo, the spirits of the
dead that be departed gathered them from out of Erebus. Brides
and youths unwed, and old men of many and evil days, and tender
maidens with griefs yet fresh at heart; and many there were,
wounded with bronze-shod spears, men slain in fight with their
bloody mail about them. And these many ghosts flocked together
from every side about the trench with a wondrous cry, and pale fear
gat hold on me.... I drew the sharp sword from my thigh and sat
there, suffering not the strengthless heads of the dead to draw nigh
to the blood, ere I had word of Teiresias....
Anon came up the soul of my mother dead, Anticleia, the
daughter of Autolycus, the great-hearted, whom I left alive when I
departed for sacred Ilios. At the sight of her I wept, and was moved
with compassion, yet even so, for all my sore grief, I suffered her
not to draw nigh to the blood, ere I had word of Teiresias.
Anon came the soul of Theban Teiresias, with a golden sceptre in
his hand, and he knew me and spake unto me: “Son of Laertes of
the seed of Zeus, Odysseus of many devices, what seekest thou
now, wretched man—wherefore hast thou left the sunlight and come
hither to behold the dead and a land desolate of joy? Nay, hold off
from the ditch and draw back thy sharp sword, that I may drink of
the blood and tell thee sooth.” So spake he, and I put up my silver-
studded sword into the sheath, and when he had drunk the dark
blood, even then did the noble seer speak unto me....
Odyssey, Bk. XI. (Butcher & Lang’s translation).

In this weird scene Odysseus is summoning the shade of Teiresias from the
under-world. He has with his sword to keep off the host of spirits, including that of
his own mother, whom the spilt blood has attracted—and the hero is himself
terrified at the awful spectacle.
What adds to the interest of such a passage is that to the ancient Greeks this
was no imaginary picture but a statement of actual facts. It will be observed that
the dead live in a dark land, “desolate of joy.”
To the little-travelled Greeks the ocean was a river.
For—see your cellarage!
There are forty barrels with Shakespeare’s brand
Some five or six are abroach: the rest
Stand spigoted, fauceted. Try and test
What yourselves call best of the very best!
How comes it that still untouched they stand?
Why don’t you try tap, advance a stage
With the rest in cellarage?
For—see your cellarage!
There are four big butts of Milton’s brew,
How comes it you make old drips and drops
Do duty, and there devotion stops?
Leave such an abyss of malt and hops
Embellied in butts which bungs still glue?
You hate your bard! A fig for your rage!
Free him from cellarage!

R. Browning (Epilogue to Pacchiarotto and other Poems).

 Though the seasons of man full of losses
Make empty the years full of youth,
If but one thing be constant in crosses,
Change lays not her hand upon truth;
Hopes die, and their tombs are for token
That the grief as the joy of them ends
Ere time that breaks all men has broken
The faith between friends.

Though the many lights dwindle to one light,

There is help if the heaven has one;
Though the skies be discrowned of the sunlight
And the earth dispossessed of the sun,
They have moonlight and sleep for repayment,
When, refreshed as a bride and set free,
With stars and sea-winds in her raiment,
Night sinks on the sea.

Swinburne (Dedication, 1865).

It is hardly possible for a younger generation to realize the almost intoxicating

effect produced upon us by Swinburne’s new melodies. Although the Poems and
Ballads were largely erotic, the curious fact is that we were too much carried away
by the beauty and swing of his verse to trouble about the sensual element in it.
That element was in itself an artificial production and not a reflection of the poet’s
own emotions, for he was free from sensuality. It was with us more a question of
music. Swinburne himself preferred a musical word or line to one that would more
aptly express his meaning; and in the “Dedication,” from which the above verses
are quoted, several lines will not bear analysis. However, this was one of our
favourites among his poems.
 O daughters of dreams and of stories
That life is not wearied of yet,
Faustine, Fragoletta, Dolores,
Félise and Yolande and Juliette,
Shall I find you not still, shall I miss you,
When sleep, that is true or that seems,
Comes back to me hopeless to kiss you,
O daughters of dreams?

They are past as a slumber that passes,

As the dew of a dawn of old time;
More frail than the shadows on glasses,
More fleet than a wave or a rhyme.
As the waves after ebb drawing seaward,
When their hollows are full of the night,
So the birds that flew singing to me-ward
Recede out of sight.

He asks that his wild “storm-birds of passion” may find a home in our calmer
world:—
 In their wings though the sea-wind yet quivers,
Will you spare not a space for them there
Made green with the running of rivers
And gracious with temperate air;
In the fields and the turreted cities,
That cover from sunshine and rain
Fair passions and bountiful pities
And loves without stain?

In a land of clear colours and stories,

In a region of shadowless hours,
Where earth has a garment of glories
And a murmur of musical flowers;
In woods where the spring half uncovers
The flush of her amorous face,
By the waters that listen for lovers
For these is there place?

Though the world of your hands be more gracious

And lovelier in lordship of things
Clothed round by sweet art with the spacious
Warm heaven of her imminent wings,
Let them enter, unfledged and nigh fainting,
For the love of old loves and lost times;
And receive in your palace of painting
This revel of rhymes.

Then come the final verses quoted above. These are somewhat detached in
meaning from the rest, and form a sort of Envoi: “Whatever changes or passes,
there is always some beautiful thing that survives.”
As might be expected Swinburne was much parodied (and indeed in the
Heptalogia and in the poems lately published he parodied himself). The above
poem has been cleverly parodied by a lawyer, Sir Frederick Pollock. (Although
parodies go as far back as the Fifth Century B.C. I know of no other lawyer who,
qua lawyer, has successfully taken a hand in the game.) In his parody Pollock’s
subject was the great changes effected by the Judicature Act, when the old Courts
of Common Law, Chancery, and others were consolidated into one Supreme Court,
and the various classes of business assigned to different “Divisions.” Also owing to
changes in procedure, much of the old technical learning became obsolete. His last
verse is as follows (compare with the second verse quoted above):
 Though the Courts that were manifold dwindle
To divers Divisions of one,
And no fire from your face may rekindle
The light of old learning undone,
We have suitors and briefs for our payment,
While, so long as a Court shall hold pleas,
We talk moonshine with wigs for our raiment,
Not sinking the fees.

Wulf died, as he had lived, a heathen. Placidia, who loved him

well, as she loved all righteous and noble souls, had succeeded once
in persuading him to accept baptism. Adolf himself acted as one of
his sponsors; and the old warrior was in the act of stepping into the
font, when he turned suddenly to the bishop and asked, ‘Where
were the souls of his heathen ancestors?’ “In hell,” replied the
worthy prelate. Wulf drew back from the font, and threw his
bearskin cloak around him—“He would prefer, if Adolf had no
objection, to go to his own people.” And so he died unbaptized, and
went to his own place.
Charles Kingsley (Hypatia).

This story appears in several old chronicles (Notes and Queries, 7th Ser. X, 33),
but the name should be Radbod. He was Duke or Chief of the Frisians, and the
episode probably occurred in Heligoland, from which island he ruled his people.

I am thankful for small mercies. I compared notes with one of my

friends who expects everything of the universe, and is disappointed
when anything is less than the best; and I found that I begin at the
other extreme, expecting nothing, and am always full of thanks for
moderate goods.... In the morning I awake, and find the old world,
wife, babes and mother, Concord and Boston, the dear old spiritual
world, and even the dear old devil not far off. If we will take the
good we find, asking no questions, we shall have heaping measures.
The great gifts are not got by analysis. Everything good is on the
highway.
R. W. Emerson (Essay on Experience).

The bee draws forth from fruit and flower

Sweet dews, that swell his golden dower;
But never injures by his kiss
Those who have made him rich in bliss.

The moth, though tortured by the flame,

Still hovers round and loves the same:
Nor is his fond attachment less:
“Alas!” he whispers, “can it be,
Spite of my ceaseless tenderness,
That I am doomed to death by thee?”

Azy Eddin Elmogadessi (L. S. Costello’s translation).

 A pine-tree stands all lonely
On a northern hill-top bare,
And, wrapped in its snowy mantle,
It slumbers peacefully there.

Its dreams are of a palm-tree,

Far-off in the morning land,
Which in lone silence sorrows
On a burning, rocky strand.

Heinrich Heine (1797-1856)

Many a time
At evening, when the earliest stars began
To move along the edges of the hills,
Rising or setting, would he stand alone
Beneath the trees or by the glimmering lake.
... Then in that silence, while he hung
Listening, a gentle shock of mild surprise
Has carried far into his heart the voice
Of mountain torrents; or the visible scene
Would enter unawares into his mind,
With all its solemn imagery, its rocks,
Its woods, and that uncertain heaven, received
Into the bosom of the steady lake.

Wordsworth (The Prelude, Bk. V).

THE FRIEND OF HUMANITY AND THE KNIFE GRINDER
 FRIEND OF HUMANITY.
“Needy Knife-grinder! whither are you going?
Rough is the road, your wheel is out of order;
Bleak blows the blast—your hat has got a hole in’t,
So have your breeches!

“Weary Knife-grinder! little think the proud ones,

Who in their coaches roll along the turnpike-road,
what hard work ’tis crying all day ‘Knives and
Scissors to grind O!’”

“Tell me, Knife-grinder, how you came to grind knives?

Did some rich man tyrannically use you?
Was it the squire? or parson of the parish?
Or the attorney?

“Was it the squire, for killing of his game? or

Covetous parson, for his tithes distraining?
Or roguish lawyer, made you lose your little
All in a lawsuit?

(“Have you not read the ‘Rights of Man,’ by Tom Paine?)

Drops of compassion tremble on my eyelids,
Ready to fall, as soon as you have told your
Pitiful story.”

KNIFE-GRINDER.
“Story! God bless you! I have none to tell, sir,
Only last night a-drinking at the Chequers,
This poor old hat and breeches, as you see, were
Torn in a scuffle.

“Constables came up, for to take me into

Custody; they took me before the justice;
Justice Oldmixon put me in the parish-
t k f t
 -stocks for a vagrant.

“I should be glad to drink your Honour’s health in

A pot of beer, if you will give me sixpence;
But for my part, I never love to meddle
With politics, sir.”

FRIEND OF HUMANITY.
“I give thee sixpence! I will see thee damn’d first—
Wretch! whom no sense of wrongs can rouse to vengeance—
Sordid, unfeeling, reprobate, degraded,
Spiritless outcast!”

(Kicks the Knife-grinder, overturns his wheel,

and exit in a transport of Republican
enthusiasm and universal philanthropy.)

George Canning (The Anti-Jacobin).

Written in Sapphics and said to be a parody of a poem of Southey’s, which was

afterwards suppressed.
 I loved him, but my reason bade prefer
Duty to love, reject the tempter’s bribe
Of rose and lily when each path diverged,
And either I must pace to life’s far end
As love should lead me, or, as duty urged,
Plod the worn causeway arm-in-arm with friend....
But deep within my heart of hearts there hid
Ever the confidence, amends for all,
That heaven repairs what wrong earth’s journey did,
When love from life-long exile comes at call.

R. Browning (Bifurcation, 1876)

The lady prefers Duty to Love, but she will remain constant to her lover, and
reunion with him in heaven will make amends for all. (In the remainder of the
poem Browning puts the case of the lover who, although deserted, is expected to
remain constant through life—and who falls. The lady had disobeyed Love,
because of the hardship and trouble that would follow, and Browning, whose own
married life had been a most happy one, says this was no excuse.)

We are scratched, or we are bitten

By the pets to whom we cling;
Oh, my Love she is a kitten,
And my heart’s a ball of string.

Author not traced.

 Some man of quality
Who—breathing musk from lace-work and brocade,
His solitaire amid the flow of frill,
Powdered peruke on nose, and bag at back,
And cane dependent from the ruffled wrist.—
Harangues in silvery and selectest phrase,
’Neath waxlight in a glorified saloon
Where mirrors multiply the girandole.

R. Browning (The Ring and the Book, I).

This and the next five quotations are word-pictures (see p. 85).

“Oh, what are you waiting for here, young man?

What are you looking for over the bridge?”
A little straw hat with streaming blue ribbons;
—And here it comes dancing over the bridge!

James Thomson (B.V.) (Sunday up the River).

Down in yonder greenè field

There lies a knight slain under his shield;
His hounds they lie down at his feet,
So well do they their master keep.

Anon. (The Three Ravens).

 When we cam’ in by Glasgow toun,
We were a comely sight to see;
My Love was clad in the black velvet,
And I mysel’ in cramasie. crimson

Anon. (O waly, waly, up the bank).

They see the Heroes

Sitting in the dark ship
On the foamless, long-heaving,
Violet sea,
At sunset nearing
The Happy Islands.

M. Arnold (The Strayed Reveller).

Like one, that on a lonesome road

Doth walk in fear and dread,
And having once turned round, walks on
And turns no more his head;
Because he knows a frightful fiend
Doth close behind him tread.

Coleridge (The Ancient Mariner).

 The above are from a series of word-pictures (see p. 85.)

We take cunning for a sinister or crooked wisdom; and certainly

there is a great difference between a cunning man and a wise man—
not only in point of honesty, but in point of ability.
Bacon.

Cunning, being the ape of wisdom, is the most distant from it that
can be. And as an ape for the likeness it has to a man—wanting
what really should make him so—is by so much the uglier, cunning is
only the want of understanding, which, because it cannot compass
its ends by direct ways, would do it by a trick and circumvention.
John Locke (Some Thoughts Concerning Education, 1693).

A rogue is a roundabout fool; a fool in circumbendibus.

S. T. Coleridge.

It is only by a wide comparison of facts that the wisest full-grown

men can distinguish well-rolled barrels from more supernal thunder.
George Eliot (Mill on the Floss).
 Let its teaching (the teaching of scientific and other books of
information, the “literature of knowledge”) be even partially revised,
let it be expanded, nay, even let its teaching be but placed in a
better order, and instantly it is superseded. Whereas the feeblest
works in the literature of power (poetry and what is generally known
as literature), surviving at all, survive as finished and unalterable
amongst men.... The Iliad, the Prometheus of Æschylus—the Othello
or King Lear—the Hamlet or Macbeth—and the Paradise Lost, are
triumphant for ever, as long as the languages exist in which they
speak or can be taught to speak. They never can transmigrate into
new incarnations. To reproduce these in new forms, or variations,
even if in some things they should be improved, would be to
plagiarize. A good steam engine is properly superseded by a better.
But one lovely pastoral valley is not superseded by another, nor a
statue of Praxiteles by a statue of Michael Angelo.
De Quincey (Alexander Pope).

De Quincey’s division of literature into “literature of power” and “literature of

knowledge” still remains a useful classification.

A man should be able to render a reason for the faith that is in

him.
Sydney Smith.
 How brew the brave drink, Life?
Take of the herb hight morning joy,
Take of the herb hight evening rest,
Pour in pain, lest bliss should cloy,
Shake in sin to give it zest—
Then down with the brave drink, Life!

Author not traced.

I had this attributed to Robert Burton, but cannot find it in the Anatomy of
Melancholy. It may possibly be from Richard Brathwaite, whose works I think were
at one time attributed to Burton; but I have no opportunity of consulting them.

I expect to pass through this world but once. Any good work,
therefore, I can do or show to any fellow creature, let me do it now!
Let me not defer or neglect it, for I shall not pass this way again.
William Penn.

I find that there has been much discussion in Notes and Queries and elsewhere
as to the origin of this quotation, and it is now usually attributed to the French-
American Quaker, Stephen Grellet. As, however, Bartlett’s Familiar Quotations gives
“I shall not pass this way again” as a favourite saying of William Penn’s, it seems
more reasonable to consider him the author of the above.

Youth is a blunder, Manhood a struggle, Old Age a regret.

Disraeli (Coningsby).
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