Comments on: When it Comes to Naming Wall Street’s Worst Invention Ever, Credit Default Swaps Continue to Fill the Bill

By: Citi Reports Profit, But Some Analysts Advise Further Caution on Big Banks

Citi Reports Profit, But Some Analysts Advise Further Caution on Big Banks — Tue, 10 Mar 2009 20:29:32 +0000

[...] Morning Contributing Editor Martin Hutchinson said last week that trading in credit-default swaps is tantamount to “casino capitalism,” because they are bought and sold in a murky, private market that is largely beyond the [...]

By: ben

ben — Mon, 09 Mar 2009 06:02:29 +0000

It seems from this article that AIG et al. were not really the one’s bailed out, but the contra parties on CDS. Who were these contra parties, and why would the government step in to protect them? The buyers of CDS should have done their own due diligence on AIG and the writers of the CDS, and if the CDS writers defaulted, too bad.

By: MediaMac

MediaMac — Sun, 08 Mar 2009 17:09:56 +0000

Before the first bailout, I chastised Congress and ‘talking heads’ alike that all of the focus was on the ‘spilt milk’ and not on the root cause. The government subsidy went to banks that were suffering under “mark to market”, a well-intended but ill-conceived accounting philosophy that has no roll in a true “market economy”.

At the most, banks should have been bailed out exclusively on the non-performance aspect of the underlying debt. Specifically, the lost interest income over a preset period of time (3-5 years). In the absence of “mark to market”, the banks could have sustained the infusion as loans secured by low interest convertible debentures. All for less than half the amount being dispersed, and largely recoverable for the taxpayers.

Win-Win-Win!

Stay tuned for my take on a Recovery Plan.

By: c joe

c joe — Sun, 08 Mar 2009 13:23:46 +0000

Dear CDS Critic:

It appears we Citizens are obsessed with the Blame Game, when we get the perpitrator properly identified, we can then go about perfecting the “Cure.!”
Well guess what? Will that bring back ENRON? Bear Sterns? Bernie Maloof’s lost fortunes? AIG’s Missteps? GM/Chryslers financial crisis? The banking Crisis? The Housing Crisis?
It appears to me, that Government’s Cures for the ills that face us, are proving to be more impotent, than the very ills that face us?
When this crisis is all over, we will be left with monutains of ill conceived debt, that we plunged into, because our leadership said we must. Our leadership in Washington, is
IMPOTENT, TOO!
The Resolution Trust Company, successfully dealt with the last mortgage crisis, as did other, “Focused Approaches,” in earlier times. Why do we not emply “Tried & True Remedies?”
We cannot, “Spend our way out of a poorly constructed Economy Built upon Foolish, Out of Control SPENDING?
CHANGE CHANGE CHANGE INDEED! It all apperars to be much the same to me!
c joe

By: CDS Trader

CDS Trader — Fri, 06 Mar 2009 14:11:40 +0000

“The problem is that the CDSs were sold (and bought) with very complicated mathematical models that were not perfect. So instead of selling the exposures to credit just once, it was sold 10 to 20 times (of the underlying asset) by investment bankers.”

You have not explained why this is a problem. It’s called *hedging*.

“The SEC did a probe of the CDS market in late 2008 and found the cost of default insurance for Bear Stearns and Lehman spiked in the days before these wall street firms collapsed.”

Well obviously the CDS spiked. The market saw that the two companies were in trouble so people rushed to buy protection to cover their losses! I think it’s an interesting discussion to be had regarding whether this creates positive feedback loops, but for Fuld/Cayne to complain about short-selling/CDS is pretty hypocritical given they are the two most important risk management tools in a bank’s armoury.

“He estimates that the CDS market is $35 to $65 TRILLION and its unregulated.”

See my post above. DTCC releases weekly data on the size of the CDS market (http://www.dtcc.com/products/derivserv/data/index.php?lpos=home_splash_promo&lid=index.php) and it is currently around $28 trillion. However, as per my post above, this is a *notional* value. If you don’t appreciate what this means then frankly you have no place discussing the pros and cons of derivatives.

“Do not even think about asking any European bank what they think of CDSs, as they have lost billions on these instruments.”

Erm, this is just complete crap. European banks such as Deutsche, Credit Suisse are two of the world’s biggest CDS dealers and have *made* billions from them.

“they are financial weapons of mass destruction and have been toxic investments for many banks.”

In my opinion, just because you *can* lose lots of money on investments doesn’t mean they should just be banned outright.

CDS are a vital hedging tool and help the easy flow of credit in the economy. It’s true that a massive speculation market has grown up around them, but this is an inevitable consequence of any market. Do you own stocks? I’m guessing you don’t buy majority stakes to control the company, so all you’re doing is speculating!

By: Adam Smith

Adam Smith — Fri, 06 Mar 2009 05:03:06 +0000

You can check out how credit default swaps became the accelerant for the current financial crisis at several financial news networks, Bloomberg, Financial times and Seeking Alpha. CDS was supossed to be a financial instrument to transfer risk. The problem is that the CDSs were sold (and bought) with very complicated mathematical models that were not perfect. So instead of selling the exposures to credit just once, it was sold 10 to 20 times (of the underlying asset) by investment bankers. The SEC did a probe of the CDS market in late 2008 and found the cost of default insurance for Bear Stearns and Lehman spiked in the days before these wall street firms collapsed. Frank Partnoy(a former derivatives broker) stated,when asked about what part the CDSs played in the financial crisis, “they were the centerpiece, really”. “That’s why the banks lost all the money”(60 miniutes). The CDS market is unregulated and not trasnparent so few people in the CDS chain knew the financial stability of everyone else in the chain. Read Professor Greenberger’s article on regulatory reform. He estimates that the CDS market is $35 to $65 TRILLION and its unregulated. Check out the article by GH bank on “Credit Default Swaps Almost Bring Down Global Financil System”. Do not even think about asking any European bank what they think of CDSs, as they have lost billions on these instruments. When the real world has lost billions on CDSs, they are financial weapons of mass destruction and have been toxic investments for many banks.

By: Bob Sandridge

Bob Sandridge — Thu, 05 Mar 2009 17:40:34 +0000

The problem is ‘making money’. If the day traders, thoughs that roll the stocks for daily, weekly and other short term gains, abusing the work of Wall Street, go some place else, the true investors could build retirement equity and watch for value and company (new and old) growth. The government is so self serving that anything goes and investor be ware. Why can’t they be honest and admit ”it’s not ‘public servant’ but self serving”. It takes drive to get a head and Bill is King. If Obama succeeds ‘praise the Lord’, if not, thanks to the politicians and the Wall Street crowd. I’ll die, thanking God for a great life as an American and looking foward to seeing the day traders, politicians, lawyers and bankers in the ‘tribulation’. Gods mercy, forgiveness and grace on all. Bob S.

By: CDS Trader

CDS Trader — Thu, 05 Mar 2009 14:28:52 +0000

LB and BS did *not* go down solely because of CDS – show some evidence before chucking around these random assertions, please! Thye collapsed because they couldnt raise any short-term funding because the market had lost confidence that they were solvent thanks to massive amounts of illiquid/difficult to value assets on their balance sheet.

How do you think people lose money when selling CDS? They *pay* someone else; ergo the settlement leg is zero-sum.

It’s true that lots of people have lost lots of money on CDS, but others have made massive amounts as well…

Furthermore, the bulk of CDS trades that brought down AIG were protection on senior tranches of asset-backed CDOs etc. The big investment banks bought a lot of this protection. If AIG defaults on these payouts the remaining banks are screwed, since the MTM is in their favour. So good call those who think AIG should just be left to die.

By: former hedge fund trader

former hedge fund trader — Thu, 05 Mar 2009 12:57:47 +0000

rubbish article

The sellers of CDS, are the equivalent of buyers of debt in that credit exposure. If they thought it was ok to take on this credit risk based on the premium they were receiving, so be it – these are the true criminals: individuals, who were happy to receive above-average renumeration for playing with credit risk they (1) did not try to understand, (2) did not due their due diligence on (3) and never owned up to the fact they were getting paid hugely for this unsustainable trading strategy

whats more – if one takes out a huge short credit position by buying CDS, this does not create a self-perpetuation market sell-off process which brings the underlying credit closer to bankruptcy

sorry – but it is wrong to print such a damning article without consultation with established market participants

I would expect a retraction of this article with commentary from those that truly understand this market from a respected journalist. Anything less would be tantamount to sensationalist, superficial media manipulation for political means

good luck

By: Adam Smith

Adam Smith — Thu, 05 Mar 2009 03:57:29 +0000

Great article and right on point. If CDSs are a zero sum game, then why is Lehman gone? Bear Stearns is gone too because of CDSs and AIG is a great example of how they are NOT a zero sum game. If they were, the U.S. Government would not be “bailing” them out. There are several German Banks that have had to write down Billions due to CDSs. Several Municipalities owe billions due to Swaps and several pension plans have lost billions due to CDS. If P.T. Barnum were alive today, he would be selling credit default swaps and so would Ponzi.