Christopher Whalen

AIG: Before Credit Default Swaps, There Was Reinsurance

What may be wrong with the FAI-HIH letter is that is suggests that the reinsurance was not a true, risk-shifting transaction. It suggests, IMHO, that the reinsurance was a canard meant to window dress the financial statement of the purchasers of protection. Good questions.

Taking Apart Jake DeSantis' Letter

Ditto

Netting Derivatives: Slippery Slope Marred by Opaqueness

Good comment. The last several graphs are especially important. I still do not think people appreciate how entirely screwed up CDS contracts are as an insurance/barrier option type offering. In plain vanilla, single name CDS, we are pricing the obligation to fund par less recovery on a corporate bond default, but we price this risk vs. short-term spreads and volatility!!!

Then there is the correlation problem. Unlike ship sinkings and earthquakes, traditional low-beta insurance risks uncorrelated to the economy/markets (and, indeed, were a hedge to the economy/markets!!!!), CDS is high beta and thus cannot really be hedged. Even a very broad portfolio of such risks will still go to hell in a severe downturn such as we see today. CDS does not manage risk, it creates risk in vast amounts in order to generate commission income for the CDS dealer community.

That is why I believe that clearing is not really the issue when it comes to "fixing" CDS. I think we need to abandon the ISDA model, which was copied from the IR/FX template, and look at more traditional insurance type models and capital/collateral levels before CDS or its successor make sense and thus gain investor support

FDIC Won't Run Out of Money, But WaMu May Be Toast

Thanks for the comments. People who call people names, and don't have trhe courage to use their real names, usually are beneath contempt. When I put up a post, I used my real name so you know who is talking. People who hide behind screen names are cowards and have no credibility. That said, I understand that folks are under the gun this week.

Bottom line on WaMu: 1) how high does the loss rate go and 2) how long does it stay there. WaMu is already 2x peer in terms of loss rates w/o the rancid Providian credit card book. Add the cc book, which is around 1,000 bp of default now, and life gets real interesting. That is why I expect WaMu to be recapitalized by Uncle Sam.

Sleep well kiddies.