Comments on: Credit Default Swaps: If It Talks Like Insurance And It Walks Like Insurance It Should Re Regulated Like Insurance

By: gloriasolideo

gloriasolideo — Fri, 24 Oct 2008 12:39:08 +0000

Hugh: I think you have a valid point. The “insurable interest” issue does not solve all problems with CDS’s, only those tied to speculation. The problem you mention is what I call “chaining,” where a security is insured by a CDS and that CDS is insured against loss by another CDS and that CDS may be insured by a still further CDS. All have “insurable interests” but I am convinced that under such circumstances we would still be building a house of cards.

What would prevent such a mess from being a house of cards are the things that Ian talks about: adequate capitalization, regulation, etc. They all, I think, must fit together.

Another problem I see that happens in the event of systemic breakdown is the presence of those securitization agreements, especially those for Mortgage-backed securities. So many times in the last year, I, as an attorney, tried to renegotiate a home loan, only to find that the creditor was unable to do so because the loan was part of a package and the docs that created the package instructed the holder to foreclose, foreclose, foreclose. No rational argument for abeyance would do, as the holder felt bound by contract to continue. Common sense was totally taken out of the picture.

By: wigwam

wigwam — Fri, 24 Oct 2008 05:07:07 +0000

I’m way into EPU land, but I’ve got to ask this very naive question. If I have a mortgage, what prevents me (or my confederate) from buying a swap on that mortgage, or to or three or ten or 100? And, what if I then default on that mortgage? Does my confederate get 100 times the difference between the face value of that mortage and the present value of my house?

Inquiring minds want to know.

By: Synoia

Synoia — Fri, 24 Oct 2008 04:03:56 +0000

I am willing to bet (here’s my $100), that EVERY SISA (Stated) loan app was fraudulent. Every one.

As for vengence, Here’s out idea:.

http://agonist.org/synoia/2008.....ry_lawsuit

It names the plaintiffs, the defendants, the legal theory, the penalties and how to fund the lawsuit. Could some of the fine legal mide at FDL take a look at it?

And we’re beginning to assemble the support for the legal theory, and the chain of evidence.

By: masaccio

masaccio — Fri, 24 Oct 2008 03:45:32 +0000

The credit default swaps on Lehman Bros. debt settled this week. There were $72bn outstanding. The debt sold for $.08 on the dollar, so the protection sellers were on the hook for substantially the whole loss. The linked article says the total cash necessary to settle all of it was $5.2bn.

The loss couldn’t be much worse. The relationship between the notional amounts outstanding and the amount necessary to settle suggests that the gross problem two orders of magnitude smaller than the notional amount outstanding.

By: MsAnnaNOLA

MsAnnaNOLA — Fri, 24 Oct 2008 02:55:09 +0000

True the banks have to keep it on their books but also the model whereas the mortgage brokers are paid a fat fee to sell unsuspecting home buyers a loan that is more expensive than they qualify for has got to stop.

This part of the puzzle is very obvious. The mortgage brokers got paid more money the more likely the loan was to default. The riskier the loan the fatter the commission.

If mortgage brokers are to exist, they must be licensed and have a fiduciary duty to their client the home purchaser not the financial institution paying them a kickback.

The fees should be standardized. Oh and all the brokers who falsified mortgage documets get fined and put in jail and can never be licensed.

By: ImperialFlow

ImperialFlow — Fri, 24 Oct 2008 02:04:55 +0000

I’m a little confused still. If the CDS’s and CDO’s don’t have any discernible link to the underlying original assets, then just how exactly was anybody supposed to know when such an asset defaulted, and would then trigger the payout?

By: STTPinOhio

STTPinOhio — Fri, 24 Oct 2008 01:43:22 +0000

A few random observations that belong here.

A 60+ trillion market with no regulation is the very definition of insanity.

Why Congress is fiddling as the hedge funds continue to burn is way beyond me. In today’s environment it’s far, far easier to make money from fear than greed, so no matter what people say I’m convinced in their last ditch efforts to make money before the inevitable sunlight (regulation) shines into their darkened lairs, they are shorting the hell out of any stock they can get their hands on from 3-4pm everyday.

Until Congress grows a pair and regulates these a-holes, the volatility in the equity markets will continue, and the average investor (who is essential to orderly markets) will stay on the sidelines.

How Greenspan can go before Waxman’s committee today and say he didn’t see this coming is bullshit.

Waxman pointed out he had over 200 Ph.D.’s on a staff of 400 at the Federal Reserve, but he had no clue.

Greenspan even offered he still doesn’t exactly know what went wrong.

Really?

Spending a couple of days around here would be a good start.

By: YYSyd

YYSyd — Fri, 24 Oct 2008 01:34:37 +0000

What is truly stupid about the “deregulation” is that the participants in their eagerness to keep the new lucrative opportunities secretly rewarding and thus avoiding scrutinization trapped themselves in an enterprise without reasonable performance data. It’s one thing to avoid rules and regulations, it is another to totally blindside yourself to the scope and scale of the business as it exploded out of sight.

By: BooRadley

BooRadley — Fri, 24 Oct 2008 01:33:02 +0000

As always, thanks Ian.

digg

By: Hugh

Hugh — Fri, 24 Oct 2008 01:15:27 +0000

The point that I am trying to make is that there wasn’t a single CDO on which a CDS was written. Both the CDOs and CDSs then went through multple subsequent iterations. Not only could those without an interest take out a CDS (naked CDSs) but the holder of the CDS could take out a CDS on the CDS. On the other side, CDOs could be aggregated, then fractionated, and spun off into new CDOs. This could happen multiple times as well and at each juncture CDSs and counter-CDSs could be taken out. The result was moral hazard and no real link back to the original mortgages or way to know what the real risk was.