Posts filed under “Derivatives”

What Are Repercussions If CDS Hedging Fails?

The EU arranged Greek bailout proceeds apace, as everyone else awaits for the official default date (Greece has already defaulted in my book, but I am in the minority). Hedged sovereign debt investors must feel like they are waiting for their wealthy grandfather to die so they can get to the reading of the will.

I have no dog in this fight, other than than an interest in seeing derivatives, especially Credit Default Swaps, appropriately regulated as insurance products.

But the process for determining a payout for CDS is fascinating. The people officially determining defaults are not objective Judges or impartial observers; rather, a group of self-appointed traders, conflicted, biased, non transparent participants — with positions affected by their own decision –  determine what a Greek default is and isn’t.

Who is on the ISDA committee?

Bank of America Merrill Lynch
Credit Suisse
Deutsche Bank AG
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
BNP Paribas
Societe Generale
Citadel Investment Group LLC
D.E. Shaw Group
BlueMountain Capital
Elliott Management Corporation

Again, I wonder loud: Why would one want to own something that has a payout determination made by this group of fucktards objective, ethical, unbiased committee members?

All of which raises a few issues in my mind: I do not know the answers to these questions, but they sure are intriguing:

1) Why would anyone ever buy a CDS? Do they have true intrinsic value, will they pay off like a futures contract or option? Or, must you pursue their payout via some combination of lobbying, litigation and persuasion?

2) If the answer to the prior question is “No to CDS,” then does this mean that sovereign debt cannot be hedged?

3) If that is the case, why would anyone buy any sovereign debt other than the very strongest nations? Outside of the US, China, Germany, and perhaps Switzerland, why would anyone purchase any other Sovereign debt? What do questions about hedging mean for debt issuance?

4) Which raises yet another question: If middling sovereign debt is downgraded by buyers, will these countries be forced to break out the printing presses? Might that add further pressure for the softening of the EU zone? the weaker countries be forced out of the EU zone?

5) Are we then going to see Drachmas, Lire and other forgotten currencies?

6) What does this mean for hyperinflation?

7) Lastly, what sort of a frenzy will the Gold Bugs be whipped up into?  Will they simply turn their enthusiasm into a yellow metal jihad? Are we going to see adverts in the WSJ and FT urging us to Buy Motherfucking Gold?

I do not know the answers to there queries, but they sure are fun to think about . . .

Category: Bailouts, Derivatives

Dinallo Testimony

Eric Dinallo’s Testimony to Congress, November 2008 on (Naked) Credit Default Swaps

Category: Derivatives, Regulation, Think Tank

Our story thus far:  The Commodity Futures Modernization Act of 2000, sponsored by Texas Senator Phil Gramm as a favor to his wife Wendy (who sat on the Board of Directors of Enron, which wanted to trade energy derivatives without oversight) was rushed through Congress in 2000. Unread by Congress or their staffers, it was…Read More

Category: Derivatives, Really, really bad calls, Regulation

ISDA: Suckers Wanted

“The International Swaps and Derivatives Association said on Thursday that based on current evidence the Greek bailout would not prompt payments on the credit default swaps.” > Here is a question for the crowd: Exactly how brain damaged, foolish and stupid must a trader be to ever buy one of these embarrassingly laughable instruments called…Read More

Category: Derivatives, Really, really bad calls

Fat Cats and Starving Dogs; Happy Foxes and Sad Sacks

This weekend, I saw Margin Call on DVD. Jeremy Irons plays a CEO of a small Goldman Sachs like company. A young analyst at the firm discovers that their highly-leveraged, massive mortgage bets are based on a VAR formula that’s flawed. It failed to consider volatility ranges beyond historical distributions. With the market swinging, his…Read More

Category: Bailouts, Derivatives, Film

Re-hypothecation: How it’s related to MF Global

Marketplace Whiteboard:

If ever there was a word that you’d expect to find in a Harry Potter  novel, it’s re-hypothecation. This a classic example of financial  people inventing impenetrable terminology to make their business look  like a black art. “Oooh, re-hypothecation, it must be magic!”

Well it isn’t.

The term “re-hypothecation” came up a lot during the MF Global meltdown; It’s quite a common term in the securities market – but what does it mean?

To explain re-hypothecation, we have to explain hypothecation. And  hypothecation is pretty simple. It’s when you lend someone money and let  the borrower keep the collateral.


Re-hypothecation: How it’s related to MF Global
Paddy Hirsch
Marketplace Jan 4, 2012

Category: Derivatives, Legal, Video

MBIA vs BAC: On why the loss causation ruling is important

“Bank of America Corp. may face billions of dollars more in liability for faulty mortgages if a judge agrees with insurer MBIA Inc. that the lender must buy back loans even if the errors didn’t cause a borrower’s default…If New York Supreme Court Justice Eileen Bransten and judges in similar cases across the country rule…Read More

Category: Derivatives, Legal, Think Tank

The (sizable) Role of Rehypothecation in the Shadow Banking System

The (sizable) Role of Rehypothecation in the Shadow Banking System Singh, Manmohan ; Aitken, James July 01, 2010 ~~~ This paper examines the sizable role of rehypothecation in the shadow banking system. Rehypothecation is the practice that allows collateral posted by, say, a hedge fund to its prime broker to be used again as collateral…Read More

Category: Credit, Derivatives, Regulation, Think Tank

MF Global Collapse Reveals Systemic Risk

> My Sunday Washington Post column is out this morning. Today, we look at The systemic risk revealed by MF Global’s collapse. As has been the case so many times, the details of this debacle are found in the regulatory changes lobbied for — and recieved — by Corzine and the MF Global legal crew….Read More

Category: Apprenticed Investor, Credit, Derivatives, Legal

The (sizable) Role of Rehypothecation In The Shadow Banking System

IMF Working Paper Monetary and Capital Markets Department The (sizable) Role of Rehypothecation in the Shadow Banking System Prepared by Manmohan Singh and James Aitken1 Authorized for distribution by Karl Habermeier July 2010 ~~~

Category: Credit, Derivatives, Think Tank