Credit Default Swaps

ianmr65

As these are becomeing a hot topic, as they theoretically show how 'risky' a bank is i thought i'd point you to a blog that explains the market in more detail. As none of the standard publications seem to want too, perhaps it's all just too horrible to contemplate.
Lex in the FT refered it in passing, to their credit (LOL)

NB the indications are that the $50 TRILLION CDS market is about to implode, this will make make sub-prime, monoline and the credit crunch look like a walk in the park.

http://michaelgracie.com/tag/credit_default_swaps/

for those of you who want more deatil on what a cds note actually is look at this post here:

http://forums.moneysavingexpert.com/showthread.html?t=777309&highlight=channel+4

a couple of quotes to mull

According to Bill Gross:

“Credit-default swaps are perhaps the most egregious offenders” in today’s banking system, Gross wrote on the company’s Web site today. “Our modern banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever.”

“The credit-default swap market is completely distorting reality,” said Henner Boettcher, treasurer of Heidelberg Cement in Heidelberg, Germany, the country’s biggest cement maker. “Given what these spreads imply about defaults, we should be in a deep depression, and we are not.”

ianmr65

*bump*bump*bump*

ianmr65

*bump*bump*bump*

purch

.........are you trying to win yourself a 'Gold Star' ??


........or is this Michael Gracie geezer paying you to 'pimp' his pathetic blog ??

ianmr65

purch wrote: »

.........are you trying to win yourself a 'Gold Star' ??


........or is this Michael Gracie geezer paying you to 'pimp' his pathetic blog ??

Neither Matey, People keep asking me about Credit Default Swaps, and it's easier to point them to a post on page one, than page five.

NB Pimping implies paying. His blog is free, has no advertising, and i have no connection with the man. I'm pointing people at it, as speaks uncomfortable truths, which are independantly verifiable, and has lot's of intresting links.

As opposed to the spun, pr hyped, jingoistic, politically influenced, propritor influenced, advertiser influenced, market influenced, badly reserched, hysterical, badly written claptrap that passes for financial journalism in this country.

purch

People keep asking me about Credit Default Swaps

Yeah we could see the huge interest this thread (if you can call one post a thread) generated :rotfl: :rotfl:

At least you won't need to keep 'bumping' it up :eek:

If you want to find out how these instruments work, I could enlighten you or point you in the way of some reliable sources, but then again, I can't really be a*sed as I guess you would rather rely on the rants of some idiot blogger !!!

ianmr65

purch wrote: »

If you want to find out how these instruments work, I could enlighten you or point you in the way of some reliable sources, but then again, I can't really be a*sed as I guess you would rather rely on the rants of some idiot blogger !!!

Are you having a bad day...

For everyone else bar me, could you, if asked, give a detailed explantion of a securitised, and derivitised market that operates at the higher realms of pure mathematics, based on unthinkable computing power:

http://www.newton.cam.ac.uk/preprints/NI05022.pdf

Have a go at enlightening everyone about this then:


"Assume now that a CDS was initiated at some date s < t and its initial price was equal to zero. Since a CDS with this property plays an important role, we introduce a formal definition. It is implicitly assumed that a recovery function g is given.

Definition A market CDS started at s is a CDS initiated at time s whose initial value is equal to zero.

A T-maturity CDS market spread at time s is the level of the spread k= k(s,T) that makes a T-maturity CDS started at s worthless at its inception. A CDS market spread at time s is thus determined by the equation Ss(k(sT))......"


There are 18 pages of this...... I look forward to reading your enlightening explanation.

jamesd

ianmr65, I suggest that you save this topic as one of your browser favorites so you can easily refer people to it whatever page it is on.

Playing games with purch isn't doing you any favors, particularly when you're linking to scaremongering already. Purch has established a reputation here of providing high quality and well thought out views that I and others would benefit from paying attention to.

purch, a new topic that doesn't take a scaremongering approach and does do things like point out how small the actual exposure of the swaps at Bear Stearns was compared to their notional value would be helpful. Still large even though much smaller.

icefall

ianmr65 wrote: »

As these are becomeing a hot topic, as they theoretically show how 'risky' a bank is i thought i'd point you to a blog that explains the market in more detail. As none of the standard publications seem to want too, perhaps it's all just too horrible to contemplate.
Lex in the FT refered it in passing, to their credit (LOL)

NB the indications are that the $50 TRILLION CDS market is about to implode, this will make make sub-prime, monoline and the credit crunch look like a walk in the park.

http://michaelgracie.com/tag/credit_default_swaps/

for those of you who want more deatil on what a cds note actually is look at this post here:

http://forums.moneysavingexpert.com/showthread.html?t=777309&highlight=channel+4

a couple of quotes to mull

According to Bill Gross:

“Credit-default swaps are perhaps the most egregious offenders” in today’s banking system, Gross wrote on the company’s Web site today. “Our modern banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever.”

“The credit-default swap market is completely distorting reality,” said Henner Boettcher, treasurer of Heidelberg Cement in Heidelberg, Germany, the country’s biggest cement maker. “Given what these spreads imply about defaults, we should be in a deep depression, and we are not.”

interesting stuff

There is a good explanation of credit default swaps from C4, Dispatches - How the Banks Bet Your Money, on youtube here

http://www.creditcrunch.co.uk/videos/

ianmr65

jamesd wrote: »

ianmr65, I suggest that you save this topic as one of your browser favorites so you can easily refer people to it whatever page it is on.

Good idea.

jamesd wrote: »

Playing games with purch isn't doing you any favors, particularly when you're linking to scaremongering already.

I'm not playing games. I'm not looking to do, or not do, my self any favours, people will either read what i write or they won't. It's their choice.

And the link is not to a 'scaremonger'. He is a senior company troubleshooter/doctor, and his links lead to respected sites, and quotes to senior inductrialists, and financiers, who are frankly and justifiably worried.

It seems clear to me that the CDS market is woefully under-reported, and highly misunderstood, by virtually everyone, including me. And much more worryingly the bulk of people who work in it.
Even more worrying is that institutions are speculating on the CDS market, on ultimate institutional default, to turn a margin. Which is a long way from the original intent when the market was started.

That the market is effectively frozen comes as no surprise. That it is still being used to risk assess institutions is not a surprise.

But that this market depends at the fundemental level on incredibly complicated mathematics, just to price it's products and which has grown so ridiculously and dangerously large so quickly. Is frankly the biggest worry, and one i have yet to see explained or justified. Hence my post above.

I'm 'all ears' for an answer?

jamesd wrote: »

how small the actual exposure of the swaps at Bear Stern was compared to their notional value would be helpful. Still large even though much smaller.

OK being as Bear didn't go down, so the swaps weren't called in and/or didn't unravel: would we be debating the counter-parties' veracity, and public statements. Bearing in mind that AAA rated paper is not what it once was, so we'd have to be convinced they were being entirely truthfull, before we even got started.

Or would we be doing a forensic examination of what bear credit swaps and their derivatives are actually out there, who is holding them, what they stand to gain, who all the counter-parties are, and whether the real level of exposure to bear swaps is understood, or allowed for.

Perhaps the real reasons bear 'couldn't be allowed to fail' are more to do with the second point, than the first.

purch

It seems clear to me that the CDS market is woefully under-reported, and highly misunderstood, by virtually everyone, including me. And much more worryingly the bulk of people who work in it

That is all very true, and even more so by the 'bloggers' who are the main peddlars of guesswork, misinformation and rumours of impending doom.

The way this $50 trillion is bandied about, as if that is the likely 'cost' of the collapse of the market, shows just how the market is misunderstood, and how the total 'at risk' is often overstated to suit the agenda of any particular 'blogger'

they theoretically show how 'risky' a bank

Comments such as this imply that the whole Banking system has ground to a halt, which is far from the truth. Yes the 'interbank' lending market has problems, but in reality the normal workings of markets are unimpeded.