Category Archives: derivatives

One Easy CDS Fix

I’ve had my share of disagreements with Arnold Kling on the subject of credit default swaps in the past, but he has a good idea today: Regulators and accountants could require firms that are net sellers of credit default swaps … Continue reading

Posted in derivatives | 7 Comments

How the CDS Market is Going to Improve

A Credit Trader has a great post on what he calls "risky annuity risk", an artifact of the CDS market which will go away when all credit default swaps start trading on a fixed coupon. If you like to geek … Continue reading

Posted in derivatives | 2 Comments

Who’s Gaining from the AIG Unwinds?

Tyler Durden has a scary post up, connecting banks’ profitability in January and February to the fact that those were the months when AIG Financial Products was unwinding an enormous number of its contracts en masse. These trades, initiated by … Continue reading

Posted in bailouts, derivatives | 5 Comments

CDS: The No-Natural-Seller Meme

I was on a panel last night with Simon Constable of Dow Jones Newswires, and I’m sure that to our lay audience a peculiar exchange in the middle of the conversation must have sounded a bit like dolphin squeaks. He … Continue reading

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Let the Government Buy Corporate Bonds

What’s the difference between spending hundreds of billions or even trillions of dollars on loans, on the one hand, and loaning out the money directly, on the other? All of the "bad bank" proposals have one thing in common: that … Continue reading

Posted in bonds and loans, derivatives | 1 Comment

John Thain and the CDS Basis Trade

John Thain seems to think that the CDS basis trade was at least partly responsible for Merrill Lynch’s $15 billion loss last quarter. This from the transcript of his interview with Maria Bartiromo: Cash assets completely separated from their derivatives. … Continue reading

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Chart of the Day: The CDS-Bond Basis

Many thanks to JP Morgan, which sent me the data for the above chart, which shows the CDS-bond basis for BBB-rated debt. In English, that means it’s the number you get when you take the CDS spread on BBB-rated credits … Continue reading

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CDS Demonization Watch, Gretchen Morgenson Edition

In the wake of making my proposal below (which I’m entirely serious about, by the way), I’m forced to agree with Gretchen Morgenson about this: Credit-default swaps clearly played a role in this debacle, and it is crucial that they … Continue reading

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How to Resolve the CDS Basis Trade Blowup

Tyler at Zero Hedge has a wonderful post on the CDS basis trade today, which is a must-read for anybody who’s interested in what happened to the CDS basis in the fourth quarter of last year or how Merrill Lynch … Continue reading

Posted in derivatives | 6 Comments

Annals of CDS Demonization, Michael Lewis Edition

Michael Lewis has a grand theory about the CDS market: it was all one big mechanism for paying traders to take a whole bunch of tail risk which would eventually blow up all of Wall Street. You know, I have … Continue reading

Posted in derivatives | 1 Comment

Explaining US Government CDS Rates

What’s going on with credit default swaps on the US government? 5-year CDS are trading in the 50bp to 60bp range these days, which implies a seriously non-negligible risk of default — and the higher the expected recovery value, the … Continue reading

Posted in derivatives | 2 Comments

Tribune Implosion Datapoint of the Day

How low can recovery rates go? Today the CDS auction on Tribune’s defaulted bonds settled at 1.5 cents on the dollar, which is low but in line with expectations of bondholders essentially getting nothing once the secured creditors have been … Continue reading

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Did Derivatives Help China’s Poor?

I’ve seen some pretty strong claims on behalf of derivatives in my time, but this one, from the Economist, is definitely among the strongest: The market for derivatives also facilitated investment in developing countries. That investment brought millions of people … Continue reading

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Defending Credit Default Swaps, Arnold Kling Edition

One of the things I’ve been missing in recent months is a smart and detailed attack on credit default swaps: my slogan when it came to CDS is that "the less you know, the worse they look". So I’m very … Continue reading

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Default Recovery Swaps

With Bank of America flip–flopping on whether the appointment of a car czar constitutes an event of default for CDS purposes, Alea, who found the flip-flop, also finds a new default derivative product: the Default Recovery Swap. These things aren’t … Continue reading

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In Defense of the CDS Market

John Dizard wants to kill off the entire CDS market. It does no good, he says, and quite a lot of harm, and we’d all be better off without it. I disagree. Dizard says there are only "three possible defences … Continue reading

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More on Collateral

As I suspected, CDS collateral has a lot of complexities that I didn’t get to last time round. So with many thanks to my commenters and also to David Felsenthal of Clifford Chance, here’s more: on questions of buyers posting … Continue reading

Posted in derivatives | 1 Comment

How Does Posting Collateral Work?

Reader Dennis Mangan emails asking how and where firms post collateral in the CDS market. It’s a good question, and the answer can get as complicated as you like. But here’s a short(ish) answer. Most of the time, collateral requirements … Continue reading

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Super-Seniors: The Last Word

Sam Jones nails it. If you have any more appetite for these things, go check his blog entry out, it’s great stuff. You’ll even learn all about those Canadian leveraged super-senior conduits!

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Super-Seniors: Your Questions Answered

Super-seniors are not easy things to understand, as you’ll know if you managed to trudge through my attempted explanation. I got some good questions in the comments, here’s my attempt at the answers. Eli and fresnodan both bring up the … Continue reading

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What’s a Super-Senior Tranche?

I’ve written myself into a corner, now, and can’t think of any way to get out of writing the promised blog entry on super-senior tranches. Especially when Kevin Drum asks so nicely. So here it is. Deep breath… By now, … Continue reading

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Understanding Synthetics

Over the past few days, two very smart people have asked me about a passage in Michael Lewis’s cover story for Portfolio in which he talks about synthetic CDOs without actually using the term. They said that they didn’t quite … Continue reading

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Berkshire’s Puts: Not Such a Great Idea

Andrew Clavell delves into the murky world of Berkshire Hathaway’s equity put contracts, and concludes: The put owner has been forced into purchasing a lot more credit cover in a nasty cross gamma effect. No wonder BRK’s credit spreads have … Continue reading

Posted in derivatives, insurance | 1 Comment

Shrinking Outstanding CDS

Good news on the CDS front: Markit and Creditex are quietly and efficiently netting out contracts, bringing down notional amounts in single names alone by more than $1 trillion at this point. This is a sensible way to reduce risk … Continue reading

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Berkshire Hathaway’s Peculiar Volatility Numbers

I just got off the phone with someone who’s been making good money shorting Berkshire Hathaway stock in the past few weeks; he pointed out to me something very peculiar in Berkshire’s public statements. First, look at the 10-Q for … Continue reading

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