Bo Peng

Why Public Ownership Is Passe

"The Hand", these smart and hard-working jerks are your friends as long as their risk is tied to their reward. My point is that, under the phony "public ownership" of no ownership, these smart and hard-working jerks have nothing to lose.

Why I'm Worried About China

I'm not worried about China. I mean, things are not pretty there for sure, but not even close to "crisis".

1. Their banks do have some shaky assets which will get worse as the economy slows, but look like angels compared to those in the developed world. There's no chain reaction mechanism tying the real economy to the banks. It's to a large degree an isolated problem, and a much smaller problem. Nothing the government/GDP can't handle.

2. There's a housing bubble there in the process of busting. But it's nothing like the ones here and in Europe. There's no subprime or Alt-A. Some here have compared the housing price to income ratio in US vs China. Those people obviously know little how the newly emerging home-owner class in China live, their day-to-day cost structure, and where their real income come from.

3. The oversized package doesn't mean, as you feared, that everything stopped cold. It's not. It's the Chinese government's way of showing their resolve and capacity in avoiding China becoming a victim of contagion. The message is this: if the world stops consuming, then we'll create some consumption to get through the worst time. Many governments would like to send similar messages, unfortunately not many have the same back-up, therefore carry similar credibility.

Supply and Demand Have Little Relevance in Commodities Prices

Dave P, of course you're right in saying "demand" in the futures market is, well, demand in the futures market. What I'm trying to say here is something different, beyond semantics. Demand in the futures market is "real demand" plus demand created by real interest rate.

This Recession Will Be Anything but Deep

Today's market has been somewhat puzzling. No reports of damage from Lehman settlement, which may mean the daily hedge and collateral adjustment may have worked better than many (me included) had expected or feared. Or it could mean just a delay -- the public won't see it until the next quarterly report.

The Fed's decision yesterday to inject $630B into money market funds was also puzzling, after reports showing a sizable inflow into them. Why did they decide it was necessary, ineptitude of the Fed or factors unseen by the public?

Synthetic CDOs are definitely affected by this settlement. But I don't understand why the big fuzz all of a sudden as if it's a huge surprise. Synthetic CDOs based on ABS certainly have taken their losses a long time (months) ago. Those involving Lehman may have their equity or mezzanine tranches wiped out or severely damaged. But these tranches are very narrow. And CDO issuers (big banks) usually hedge them, though may not perfectly. The ultimate losers in synthetic CDOs are the CDO investors in equity and mezzanine tranches, of which there aren't that many.

Regardless, I think we can say by now that the government bailouts have worked. Chain reaction has been stopped, at least for now. I expect Libor to continue dropping and the money pipes to continue opening up.

Lehman's CDS Mess: Who's on the Hook?

Marley & User 283188, this article is not about AIG, or any other particular stock for that matter. My original title was "10/21: The Bottom" which is what the article says, if you care to read it in its entirety. If AIG only has $6.2M exposure as you claim, we'll find out tomorrow and the stock would reflect it.

No retraction necessary.

A Proposal on Transforming CDSs: Credit Insurance Trust

VERY insightful, Waiting out. Your comment alone is worth my labor.

It's the same idea economically. The only difference is that Lloyds of London was desgined by the names, for the names, and of the names. My CIT makes CI buyers the controller of CIT. Nobody gets a windfall from others' misery (default) except by happenstance, never by design.

Lehman's CDS Mess: Who's on the Hook?

Marley, where did you get those numbers about AIG? I'd like to see for myself. I based my guess purely on what I read about how AIG is the biggest net CDS seller, plus the timing of AIG bailout vs Lehman bankruptcy -- within days.

I agree with you that the settlement will probably not affect the senior and super-senior tranches of most CDOs. Some CDXs will be affected, but not nearly as much as single-name CDS. If AIG didn't sell much single-name CDS on Lehman and mostly sold CDS on super-senior tranche CDOs, then good for them. I'm just saying it's unlikely judging from known facts so far -- why did they need bailout then?

But even if they do have a huge exposure, the government would have no choice but to pop them up, which is my point.

A Proposal on Transforming CDSs: Credit Insurance Trust

nitadmin, CDS is fundamentally different from equity options in two important ways:

1. CDS' built-in leverage is often much higher than equity options.
2. CDS payout (default) is a jump process whereas equity prices are almost continuous.

Because of these, the exchange treatment on equity options will not work on CDS. It'd either be under-collateralized so as to provide inadequate protection against counterparty risk, or drive the price so high as to render the product economically meaningless and kill the market.

Lehman's CDS Mess: Who's on the Hook?

Yes, tekram, government (the court, rather) can forfeit private contracts but in the case of CDS, since the contracted asset is legal, prosecution would have prove intend to defraud. That's next to impossible to do on CDS since

1. It's based on market price.
2. Its payout depends on projection of future, low-probability events.

The impact would be incalculable. Banks signed on to Basel II depend on CDS to maintain their capital adequacy (Basel II is total crap but that's a different story). If all CDSs are canceled, you're talking about all European banks and most of US big banks going insolvent overnight.

In addition, there ARE legitimate use of CDS as a hedging tool. Let's say company A takes delivery on your products/service but has a deferred payment agreement of some sort. Until you get paid, you're exposed to its credit risk. You could buy CDS on it to hedge the risk. It won't be exact or perfect, but it does offer protection. When you get paid, you unwind the trade and move on.

Canceling CDS is not even close to the realm of reason. But there're much better alternatives. I have a proposal for one.

Lehman's CDS Mess: Who's on the Hook?

tekram, I don't think the government has the right to cancel private contracts unless there're "greater" causes such as national security.

Now we're talking philosophy: are we ready for totalitarianism? Paulson's bank rescue may have come close to it. But which way would you rather go, further or get back?

Lehman's CDS Mess: Who's on the Hook?

spragus, I doubt DTCC knows the complete picture. Registration at DTCC is voluntary. Many buyers and sellers would rather remain anonymous.

A Proposal on Transforming CDSs: Credit Insurance Trust

The comments above helped illustrate the inadequacy of moving CDS to exhanges. It would either continue the illusion without reducing counterparty risk in any meaningful way, or raise the seller's cost so high that it would kill the market.

Margin requirement on exchange clients must depend on the client's position. For CDS buyers, it should be tied to premium. This is fine. For sellers, it should be tied to the notional. Now this is a bit of problem. How much of the notional? 2% 5%? Effectively this is what CDS counterparties have been asking. When shit happens the exchange is left with a 95% hole. It's still a systemic risk, only bigger -- failure of the exchange would be a certain, complete systemic failure, not the "likely" failure caused by Lehman.

100% collateral on the notional? There's no way sellers could make a profit on the price buyers are willing to pay. Even 50% would be unimaginable.

I can't believe the talk of exchange traded CDS is gaining momentum. I see where this is going -- under-collateralized seller accounts, thus greater systemic risk. This is beyond sad.

My proposal of Credit Insurance addresses the fundamental flaws:

1. Insurance claims are backed by the pool of premiums. Seller can make deceiving, scandalous promises.

2. Claim payout from the Seller is spread over ten years, not an instant. Claimant can still opt to cash out by selling the CIT bond, but from the bond buyer on the secondary market, not CIT. This prevents chain reaction.

This Recession Will Be Anything but Deep

Pretzel Logic, I agree with most of what you said. But I also say the destruction of credit is close to an end -- some hedge funds, perhaps even another regional bank or two.

In addition, it's hard to argue what the gov has done to Fannie and Freddie, no matter how flawed, is not helping the housing market. And there'll be more and more such "help homeowner" legislation and policies going forward. Politicians will feel obliged to dish out handouts until the deflation is over. So housing market will be help by two sides: easy credit and homeowner support.

As to the psychological aversion to "easy credit", I don' think it'll last. We may have learned a lesson now. But we also forget. Instant gratification and greed triumphs over long-term discipline every time.

This Recession Will Be Anything but Deep

Talin, what we're witnessing is nothing less than the tragic failure of private capitalism AND democracy. This is a sad chapter in human history.

This Recession Will Be Anything but Deep

Deflation in the short term is expected, as banks and hedge funds deleverage and/or unwind. I was talking about inflation in the longer term, starting from at least a few months out, when money flows down the pipe and reaches Main St and takes effect in consumer credit, hiring, etc.