Comments on: Morgenson: Time to Unravel the Knot of Credit-Default Swaps http://www.ritholtz.com/blog/2009/01/morgenson-time-to-unravel-the-knot-of-credit-default-swaps/ Macro Perspective on the Capital Markets, Economy, Geopolitics, Technology, and Digital Media Sat, 20 Mar 2010 00:48:16 -0400 http://wordpress.org/?v=2.9.2 hourly 1 By: proton http://www.ritholtz.com/blog/2009/01/morgenson-time-to-unravel-the-knot-of-credit-default-swaps/comment-page-1/#comment-141742 proton Mon, 26 Jan 2009 17:45:26 +0000 http://www.ritholtz.com/blog/?p=17140#comment-141742 For CDS, the notional sizes involved are gigantic but the risk dollars are not that large. Still, CDSs pose systemic risks. Not because of the large amount of payments required in the unlikely case of default, but more because they amplify the counterparty risk . When everyone is nervous and wants to hedge, the market might experience an equivalent of bank run. The roots of the problem may lie in the disconnect between the amount of debt and CDS referencing it. More comments on: http://creditnotes.blogspot.com/2009/01/cds-market-size-is-concern.html For CDS, the notional sizes involved are gigantic but the risk dollars are not that large. Still, CDSs pose systemic risks. Not because of the large amount of payments required in the unlikely case of default, but more because they amplify the counterparty risk . When everyone is nervous and wants to hedge, the market might experience an equivalent of bank run. The roots of the problem may lie in the disconnect between the amount of debt and CDS referencing it. More comments on: http://creditnotes.blogspot.com/2009/01/cds-market-size-is-concern.html

]]> By: Blurtman http://www.ritholtz.com/blog/2009/01/morgenson-time-to-unravel-the-knot-of-credit-default-swaps/comment-page-1/#comment-141735 Blurtman Mon, 26 Jan 2009 17:13:32 +0000 http://www.ritholtz.com/blog/?p=17140#comment-141735 My understanding is that there is not enough money in the world to pay out all of the CDS's that are expected to be coming due. The fairest thing to do would be to mandate that the issuer honor its obligations to the point of bankruptcy. End of game, then. It is particularly ironic that the investment banks' rebuke to those who believed the fraudulent Tiple A ratings on the garbage they sold, "do better due diligence," does not apply to these banks when they whine to Geithner about AIG's inability to honor its contracts. This CDS and synthetic CDO business is a pure fantasy and taxpayers should cease paying out on this nonsense as they are in the AIG bailouts. I will applaud the cleverness of the investment banks who have filled their pockets in every possible way, but it is time to end this game. Colluding with the rating agencies to issue fraudulent ratings on the MBS' and other garbage you sell is bad enough, but to then use your knowledge of how worthless this highly rated garbage is and to take out insurance against it, and then demand that taxpayers pay when AIG cannot is absolutely outrageous. Where is Elliott Ness when you need him? My understanding is that there is not enough money in the world to pay out all of the CDS’s that are expected to be coming due. The fairest thing to do would be to mandate that the issuer honor its obligations to the point of bankruptcy. End of game, then.

It is particularly ironic that the investment banks’ rebuke to those who believed the fraudulent Tiple A ratings on the garbage they sold, “do better due diligence,” does not apply to these banks when they whine to Geithner about AIG’s inability to honor its contracts.

This CDS and synthetic CDO business is a pure fantasy and taxpayers should cease paying out on this nonsense as they are in the AIG bailouts.

I will applaud the cleverness of the investment banks who have filled their pockets in every possible way, but it is time to end this game. Colluding with the rating agencies to issue fraudulent ratings on the MBS’ and other garbage you sell is bad enough, but to then use your knowledge of how worthless this highly rated garbage is and to take out insurance against it, and then demand that taxpayers pay when AIG cannot is absolutely outrageous.

Where is Elliott Ness when you need him?

]]> By: dunnage http://www.ritholtz.com/blog/2009/01/morgenson-time-to-unravel-the-knot-of-credit-default-swaps/comment-page-1/#comment-141654 dunnage Mon, 26 Jan 2009 08:53:58 +0000 http://www.ritholtz.com/blog/?p=17140#comment-141654 not to worry. nothing is going to happen to Swaps. The "investments" banks are the government. After 4 or 5 years of hoarding to build reserves while living the good life, they'll twist their own arm and get about settling things out. Right now they are too scared as are their proxies in govt. and academia. not to worry. nothing is going to happen to Swaps. The “investments” banks are the government. After 4 or 5 years of hoarding to build reserves while living the good life, they’ll twist their own arm and get about settling things out. Right now they are too scared as are their proxies in govt. and academia.

]]> By: johnbougearel http://www.ritholtz.com/blog/2009/01/morgenson-time-to-unravel-the-knot-of-credit-default-swaps/comment-page-1/#comment-141649 johnbougearel Mon, 26 Jan 2009 05:43:56 +0000 http://www.ritholtz.com/blog/?p=17140#comment-141649 johnnyvee, I hear ya man. I cede you your point a second time. The broader issue trumps the nuances and nuances should not trump the broader issue. It is hoped however, that being as smart as we are, we can grasp both concepts simultaneously. CS: one of CWs point was specifically that CDSs are high beta, high correlated, under-collateralized junk that only increases the volatility on the downside when everything is in dynamic disequilibrium. And sdince that is precisely what they are not be designed to be, they are flawed instruments only exacerbating the broader problem being underscored by johnnyvee. johnnyvee,

I hear ya man. I cede you your point a second time. The broader issue trumps the nuances and nuances should not trump the broader issue. It is hoped however, that being as smart as we are, we can grasp both concepts simultaneously.

CS: one of CWs point was specifically that CDSs are high beta, high correlated, under-collateralized junk that only increases the volatility on the downside when everything is in dynamic disequilibrium. And sdince that is precisely what they are not be designed to be, they are flawed instruments only exacerbating the broader problem being underscored by johnnyvee.

]]> By: usphoenix http://www.ritholtz.com/blog/2009/01/morgenson-time-to-unravel-the-knot-of-credit-default-swaps/comment-page-1/#comment-141646 usphoenix Mon, 26 Jan 2009 04:49:11 +0000 http://www.ritholtz.com/blog/?p=17140#comment-141646 @jdnc123 You make some interesting points, and bring up a recall that there once was a line of distinction between financial institutions (read banks) and speculative markets (read commodities, options and casinos). Sure anything goes when its understood to be within speculative gambling establishments. Buyer beware. Just ask Madoff clients. If your point is that cds are perfectly legit outside banking and insurance circles I don't have a problem. But otherwise I do. Interestingly enough, you conjure up a more appropriate question. How was it banks saw it within their domain to gamble with cds? So a better issue might be not to kill cds, but to ban them from banks. @jdnc123 You make some interesting points, and bring up a recall that there once was a line of distinction between financial institutions (read banks) and speculative markets (read commodities, options and casinos). Sure anything goes when its understood to be within speculative gambling establishments. Buyer beware. Just ask Madoff clients.

If your point is that cds are perfectly legit outside banking and insurance circles I don’t have a problem. But otherwise I do. Interestingly enough, you conjure up a more appropriate question. How was it banks saw it within their domain to gamble with cds?

So a better issue might be not to kill cds, but to ban them from banks.

]]> By: cs http://www.ritholtz.com/blog/2009/01/morgenson-time-to-unravel-the-knot-of-credit-default-swaps/comment-page-1/#comment-141645 cs Mon, 26 Jan 2009 04:48:38 +0000 http://www.ritholtz.com/blog/?p=17140#comment-141645 Reading most of the comments here, it appears that emotions and 'fairness' is dominating the public opinion on what should be done. have to leave an unpopular post here: while we're still in the witch-hunting mode, all we will get is crisis spreading from one area to the next, and ever more public funds needed. (I've to declare here i've never worked on wall street nor made any of the huge salaries in the financial sector. And I've personally suffered financial losses, so I'm no different from the average man on the street) I'm all for catching the arsonists - AFTER we put out the fire. So, keeping emotions and 'fairness' aside: On Chris's suggestion that we ban CDS on institutions running on public money: the intentions are good, except that it's based on the premise that evil speculators are causing financial ruin in those companies. It could have been true before, but hedge funds are now mostly in ICU (half is wiped out), so I doubt they have appetite to take much risk to move markets. If most of the exposure then is by commerical firms e.g. corporates with exposures to certain banks due to their business dealings, are we unfairly denying them of their ability to seek insurance? Next, if US govt money is propping up the bank, and protection on the bank is not available, the market will always seek the alternative: buying protection on US govt itself (which is available, btw, just not as liquid yet). The issue with CDS posing systemic risk is two-fold. First, how the market (and regulators) treat it, and Second, too much leverage - which magnifies any problems. Chris suggestion of posing significant margins is good in that it reduces the implied leverage. But again, it should not drive out any genuine hedgers. Alternatives such as options is fine, but not if everyone is doing it. We do need a wide pool of alternatives to suit individual needs and prevent concentration risks. This still doesn't change how the market/regulators is treating CDS. If more people buy more insurance on my life, it doesn't drive me to die faster. But unfortunately, this is happening for companies due to accounting requirements, and banks are hit doubly hard due to capital requirements. This silly issue is pretty fundamental, and needs to be fixed. I hope that while we seek solutions to shore up balance sheets to meet acctg financial ratios so as to restore confidence (e.g. banks are insolvent/risky because xx% is breached), we don't forget that the ultimate goal: Confidence/trust, not $$, is the fundamental basis of credit. Recall JP Morgan's quote: "Because a man I do not trust could not get money from me on all the bonds in Christendom." Pujo hearings, 1912-1913 Reading most of the comments here, it appears that emotions and ‘fairness’ is dominating the public opinion on what should be done.
have to leave an unpopular post here: while we’re still in the witch-hunting mode, all we will get is crisis spreading from one area to the next, and ever more public funds needed. (I’ve to declare here i’ve never worked on wall street nor made any of the huge salaries in the financial sector. And I’ve personally suffered financial losses, so I’m no different from the average man on the street) I’m all for catching the arsonists – AFTER we put out the fire.
So, keeping emotions and ‘fairness’ aside:
On Chris’s suggestion that we ban CDS on institutions running on public money: the intentions are good, except that it’s based on the premise that evil speculators are causing financial ruin in those companies. It could have been true before, but hedge funds are now mostly in ICU (half is wiped out), so I doubt they have appetite to take much risk to move markets. If most of the exposure then is by commerical firms e.g. corporates with exposures to certain banks due to their business dealings, are we unfairly denying them of their ability to seek insurance? Next, if US govt money is propping up the bank, and protection on the bank is not available, the market will always seek the alternative: buying protection on US govt itself (which is available, btw, just not as liquid yet).
The issue with CDS posing systemic risk is two-fold. First, how the market (and regulators) treat it, and Second, too much leverage – which magnifies any problems. Chris suggestion of posing significant margins is good in that it reduces the implied leverage. But again, it should not drive out any genuine hedgers. Alternatives such as options is fine, but not if everyone is doing it. We do need a wide pool of alternatives to suit individual needs and prevent concentration risks.
This still doesn’t change how the market/regulators is treating CDS. If more people buy more insurance on my life, it doesn’t drive me to die faster. But unfortunately, this is happening for companies due to accounting requirements, and banks are hit doubly hard due to capital requirements. This silly issue is pretty fundamental, and needs to be fixed.

I hope that while we seek solutions to shore up balance sheets to meet acctg financial ratios so as to restore confidence (e.g. banks are insolvent/risky because xx% is breached), we don’t forget that the ultimate goal: Confidence/trust, not $$, is the fundamental basis of credit. Recall JP Morgan’s quote: “Because a man I do not trust could not get money from me on all the bonds in Christendom.” Pujo hearings, 1912-1913

]]> By: jdnc123 http://www.ritholtz.com/blog/2009/01/morgenson-time-to-unravel-the-knot-of-credit-default-swaps/comment-page-1/#comment-141643 jdnc123 Mon, 26 Jan 2009 04:24:08 +0000 http://www.ritholtz.com/blog/?p=17140#comment-141643 Why not get rid of the equity option market as well. While we're at it, the levered ETF market, especially the inverse ETFs to bet against financial institutions. CDS is no different than equity options. Do all option buyers or sellers have a position in the underlying? Of course not and the same is true for CDS, they are the exact same thing, but for fixed income products. Are there problems, sure, but some of these discussions are ridiculous. Most CDS contracts require initial margin and then collateral is exchanged on a daily basis, with the flow of funds dependent on the mark-to-market. Putting them on central clearinghouses makes sense, but getting rid of the entire market? Please. Like I said, unless we are ready to get rid of options and a number of other derivative markets, this doomsday talk is a bit over the top. Why not get rid of the equity option market as well. While we’re at it, the levered ETF market, especially the inverse ETFs to bet against financial institutions. CDS is no different than equity options. Do all option buyers or sellers have a position in the underlying? Of course not and the same is true for CDS, they are the exact same thing, but for fixed income products. Are there problems, sure, but some of these discussions are ridiculous. Most CDS contracts require initial margin and then collateral is exchanged on a daily basis, with the flow of funds dependent on the mark-to-market. Putting them on central clearinghouses makes sense, but getting rid of the entire market? Please. Like I said, unless we are ready to get rid of options and a number of other derivative markets, this doomsday talk is a bit over the top.

]]> By: JohnnyVee http://www.ritholtz.com/blog/2009/01/morgenson-time-to-unravel-the-knot-of-credit-default-swaps/comment-page-1/#comment-141634 JohnnyVee Mon, 26 Jan 2009 02:33:10 +0000 http://www.ritholtz.com/blog/?p=17140#comment-141634 johnbougearel How can FVA + CDS make an insolvent bank situation worse? It seems like a mere distraction from the real issue. johnbougearel

How can FVA + CDS make an insolvent bank situation worse? It seems like a mere distraction from the real issue.

]]> By: usphoenix http://www.ritholtz.com/blog/2009/01/morgenson-time-to-unravel-the-knot-of-credit-default-swaps/comment-page-1/#comment-141632 usphoenix Mon, 26 Jan 2009 02:17:43 +0000 http://www.ritholtz.com/blog/?p=17140#comment-141632 God I love this blog when it gets contributions like the one ... @johnbougearel. Thank you. What an enlightening spot. Homework. Honest. Real. @BR: Don't take offense. This is your blog. You're the man. God I love this blog when it gets contributions like the one …

@johnbougearel. Thank you. What an enlightening spot. Homework. Honest. Real.

@BR: Don’t take offense. This is your blog. You’re the man.

]]> By: phreddy http://www.ritholtz.com/blog/2009/01/morgenson-time-to-unravel-the-knot-of-credit-default-swaps/comment-page-1/#comment-141629 phreddy Mon, 26 Jan 2009 02:07:58 +0000 http://www.ritholtz.com/blog/?p=17140#comment-141629 I see that the consensus is to let the Financial houses lay in the bed that they made. I concur, but how about a Chinese twist? Public beheadings would be a hit on Broadway! As far as FVA goes, if the investing public sits still for it, who else cares? Fortunately, I can read a balance sheet and income statement whether its Mark to Market or FVA. I see that the consensus is to let the Financial houses lay in the bed that they made. I concur, but how about a Chinese twist? Public beheadings would be a hit on Broadway! As far as FVA goes, if the investing public sits still for it, who else cares? Fortunately, I can read a balance sheet and income statement whether its Mark to Market or FVA.

]]>