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What scapegoat?

June 16, 2010

Bad news if you're a government looking for a scapegoat; good news if you're a demonized "short" trader: A Brussels investigation into possible problems with speculative trading of credit default swaps on Greek sovereign debt in the wake of the country's crisis is understood to have found few serious flaws, triggering rumours that officials are […]

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The very first CDS

June 10, 2010

Yes, conspiracy theorists, there is a link between environmental disasters and financial meltdowns. In the wake of the Exxon Valdez disaster, Exxon was faced with $5B in fines. The company turned to its banking partner, J.P. Morgan, and asked for a line of credit in that amount. J.P. Morgan was reluctant to grant the loan for […]

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Another day, another article demonizing CDS

November 28, 2009

Bloomberg has a new article up about how the CDS market is starting to crumble - the sort of piece that looks like it's been sitting on a back burner waiting for an excuse to stoke the flames of derivative fear (thanks, Dubai!). One of the article's chief arguments is that "credit-default swaps tied to Thomson […]

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Measuring aggregate risk in CDS markets

September 25, 2009

The ECB recently published this lengthy report (PDF link) on the state of the CDS market, with particular focus on counterparty risk. It is well worth a read for either a cursory overview or more in-depth look at the mechanics and concerns of that market. Section 3.4 regarding counterparty risk measures was especially interesting to […]

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CDS Markets, briefly (or not so briefly)

July 15, 2009

In response to Daniel Indiviglio's call for "someone who understands the derivatives market," I posted the following comment on the Atlantic Business blog - and I reprint it here not just because it turned out a surprisingly complete thought, but because I'm a glutton for blogging laziness: The CDS market works similarly to any other […]

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Spotted: a free lunch

June 11, 2009

The internets are buzzing about the CDS trade that netted small brokerage firm Amherst a nice profit at the expense of Wall Street giant JPM. I may be missing something, but it seems to me that the risk hasn't disappeared (as is being implied), it has merely been transferred from the mortgage originators (or whomever […]

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Deconstructing the Gaussian copula, part I

June 5, 2009

A number of misconceptions about the Gaussian copula are addressed.

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Negative swap spreads

June 2, 2009

Felix Salmon writes about the negative swap spread - a fascinating turn of events. Or at least, it was when the swap spread went negative almost a year ago. The swap spread is the extra amount that an interest rate swap yields over a similar Treasury bond. Typically, a swap yields a few basis points […]

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The CDS made me do it

May 1, 2009

The Chrysler debacle has given rise to another CDS-related claim: these dastardly products permit scenarios in which bondholders are willing to put a company into bankruptcy by distorting the investors' incentives.  If the bondholders own a lot of CDS, then bankruptcy is more profitable than ongoing operations or restructuring. There are two major problems with […]

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The Short Squeeze

April 30, 2009

It is a favorite chorus of the anti-CDS crowd that CDS can make it more difficult for a company to survive, since bidding up CDS prices can affect the firm's cost of borrowing. This is about a hair's width away from the oft-cited argument that "short selling is bad because it drives down stock prices," […]

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The hits just keep on coming: Citigroup earnings

April 17, 2009

The accounting alchemy Citi used this morning to report a "profit" is being much more widely reported than Goldman's Decembrist revolt, but I want to address it nonetheless. On the surface, Citi reported a profit of $1.6B.  Unfortunately, by the time that trickled down to common shareholders there was only -$966M left, a loss of […]

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The Man who Broke the CDS?

March 24, 2009

George Soros has written an opinion in today's WSJ calling for the regulation - and elimination - of CDS. He notes that CDS are instruments which allow speculation on default: What makes [CDS] toxic is that such speculation can be self-validating. I find his nature-of-the-security argument severely lacking: The negative effect is reinforced by the […]

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