Category Archives: derivatives

How Banks Hedge Counterparty Risk

Posted on October 3, 2008 by Felix

Here’s the long post I promised yesterday on hedging counterparty risk. It’s by someone who wishes to remain anonymous, but who used to do this for a living at a very large bank. It’s also incredibly wonky, even without a … Continue reading →

Posted in banking, derivatives | 7 Comments

Is Transparency Always a Good Idea?

Posted on October 2, 2008 by Felix

I’m not a fan of this proposal from Josh Rosner, via Gillian Tett: Joshua Rosner, a New York analyst, for example, has made the sensible suggestion that AIG should reveal the banks that have received credit protection as a condition … Continue reading →

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Goldman Sachs and the Regulatory Arbitrage Trade

Posted on October 2, 2008 by Felix

Sam Jones has a great piece this morning on regulatory arbitrage under Basel II — which turns out to have been one of the big business lines of the doomed AIG Financial Products. Banks have to have a certain amount … Continue reading →

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A New Derivative

Posted on October 2, 2008 by Felix

What was all that about derivatives being finanial weapons of mass destruction? Not any more! Chicago-based Actuarials Holdings, parent company of the Everest OTC Trade Facility and the AE Clearinghouse, has unveiled what it says is a revolutionary ‘safe’ derivative … Continue reading →

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When the CDX Rolls

Posted on September 30, 2008 by Felix

I spoke this morning to Marc Barrachin of Markit, the company which owns and runs most of the benchmark CDS indices. Markit recently delayed, for a second time, the biannual "roll" where the components of its indices are updated to … Continue reading →

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Measuring the Credit Crisis in Markit Press Releases

Posted on September 29, 2008 by Felix

Markit’s CDX credit-derivative index was meant to "roll" — be updated with the most up-to-date set of credits — on September 22. The roll was first delayed by one week, and then, in a vote on Saturday, was delayed another … Continue reading →

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Remuneration Datapoint of the Day

Posted on September 27, 2008 by Felix

From Gretchen Morgenson’s article on AIG Financial Products, the 377-person unit which brought down a 116,000-employee behemoth: Over all, A.I.G. Financial Products paid its employees $3.56 billion during the last seven years.

Posted in derivatives, insurance, pay | 1 Comment

CDS Datapoint of the Day

Posted on September 26, 2008 by Felix

From Paul Davies: One broker quoted McDonald’s CDS at about 26.5 basis points, compared with 30bp for the US, on Friday morning. Yes, the cost of protecting US Treasury bonds against default has now reached 30bp — higher than McDonald’s. … Continue reading →

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The Pressure to Hedge in the Credit Markets

Posted on September 25, 2008 by Felix

Lex has a theory about the way in which the CDS market can drive a vicious cycle in credit: The pressure to hedge has led the most liquid contracts to overshoot, in effect pricing in absurd default risks and recovery … Continue reading →

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Another Knee-Jerk Proposal From Christopher Cox

Posted on September 23, 2008 by Felix

I’m getting rather annoyed at Christopher Cox. His short-selling ban was a bad idea, but at least it got us through the weekend to a point at which a bailout plan could start taking shape. His work here is done; … Continue reading →

Posted in derivatives, regulation | 4 Comments

AIG: The CDS Market Bailout

Posted on September 22, 2008 by Felix

I would never presume to understand what Hank Paulson is thinking. But here’s one idea of why he bailed out AIG but not Lehman: the asymmetry in their respective CDS positions. Back in the blissful days of April 2007, I … Continue reading →

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Counterparty Risk Moves to the Fore

Posted on September 16, 2008 by Felix

The best news to come out of the Fed meeting was that Tim Geithner wasn’t there. That means he was in New York, where he belongs, worrying about AIG and counterparty risk rather than macroeconomics and the Fed Funds rate. … Continue reading →

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Frannie CDS Triggered

Posted on September 8, 2008 by Felix

According to standard ISDA definitions, A Credit Event occurs if the Reference Entity “seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially … Continue reading →

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Peter Niculescu, Teflon Executive

Posted on August 29, 2008 by Felix

How did Peter Niculescu manage to get promoted to the important new position of Chief Business Officer at Fannie Mae? This is how Fannie Mae describes his history at the company after he joined in 1999: In his previous position … Continue reading →

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Bear Stearns Conspiracy Watch: Bloomberg Piles On

Posted on August 11, 2008 by Felix

The latest journalist to start waxing conspiratorial about the collapse of Bear Stearns is Gary Matsumoto of Bloomberg. He’s looking at options trades which he reckons are very suspicious: In a gambit with such low odds of success that traders … Continue reading →

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Defragging the CDS Market

Posted on July 2, 2008 by Felix

You know when you’ve had a computer for a long time, and the hard drive is full of crap, and some tech wizard comes up with a way of defragging it or something, and the idea is that suddenly it’ll … Continue reading →

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Schrodinger’s Option

Posted on June 13, 2008 by Felix

Have you ever wondered why hedge funds love to hire mathematics and physics PhDs? Maybe this post, and this follow-up, might help explain. It turns out that the Black-Scholes PDE (that’s partial differential equation, of course) is basically – um, … Continue reading →

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The Sorry Story of Jefferson County’s Sewer Bonds

Posted on June 5, 2008 by Felix

One of Andrew Clavell’s best posts is the one where he was giving advice, retrospectively, to a Pennsylvania school board which was being sold swaptions by investment bankers: Admitting you don’t know is pure alpha; you will not claim to … Continue reading →

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Where’s the IP in Finance?

Posted on June 2, 2008 by Felix

Gillian Tett had an excellent article in the FT this weekend on innovation in the derivatives markets: I highly recommend you read it. She gets some great quotes: “It’s a strange business,” admits one senior banker. “First you make money … Continue reading →

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A New Moody’s Rating Scandal

Posted on May 21, 2008 by Felix

The FT has an explosive story today about the market in CPDOs, and the way that Moody’s, in particular, rated them. The problem is that CPDOs are so ridiculously complex that this scandal – and it is a scandal – … Continue reading →

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CDS Counterparty Risk and the Bear Stearns Bailout

Posted on May 20, 2008 by Felix

Jesse Eisinger points me to David Evans’s 4,400-word article on credit default swaps; he likes it a lot. Me, not so much. If it were shorter, it wouldn’t bother me so much. But if you’re writing at that sort of … Continue reading →

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Moving Towards Exchange-Traded Credit Default Swaps

Posted on May 13, 2008 by Felix

Ken Griffin wants to move to a system of exchange-traded credit default swaps: Mr. Griffin wants the government to require the use of exchanges and clearing houses for credit default swaps and derivatives. That way, instead of investment banks playing … Continue reading →

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How the Futures Conundrum Causes Higher Food Prices

Posted on April 22, 2008 by Felix

On March 28, Diana Henriques examined the weird phenomenon of futures prices expiring well above cash prices in the agricultural-commodities market. Today, she returns to the same subject, from the point of view of farmers, who can be significantly damaged … Continue reading →

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Credit Derivatives Datapoint of the Day

Posted on April 16, 2008 by Felix

Isda: The notional amount outstanding of credit default swaps (CDS) grew 37 percent to $62.2 trillion in the second half of 2007 from $45.5 trillion at mid-year. CDS notional growth for the whole of 2007 was 81 percent from $34.5 … Continue reading →

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Which Taleb is Right?

Posted on April 8, 2008 by Felix

Pablo Triana today wades back in to the Black-Scholes debate, and takes aim at Michael Lewis: Black-Scholes has been blamed in certain quarters for the subprime crisis. Essentially, the argument is that those blinded by the dictates of the model … Continue reading →

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