Rakesh Saxena

What, If Anything, Are CDS Spreads Telling Us?

Fabian hug: You obviously don't read English very well. I am not suggesting that you base any strategy on the CDS marketplace; I am only pointing to what signals you can derive. Ignore them at your own peril. But do try to upgrade your writing skills so that you can write something sensible. - Rakesh


On Mar 10 09:48 AM fabien hug wrote:

> Sorry Sir but this is a load of crap. No volumes, no counter party,
> no disclosing of participants, no nothing and we should base our
> investment strategy on that! Great.
> Now, some of these non-disclosed geniuses are willing to pay money
> to protect themselves against a default of the US gvmt or even a
> default of GE! Did you ever thought about who is going to fork the
> bill when such default occurs? AIG or UBS or Merrill-Bofa?
> To me it sounds like oil $ 200 before Xmas, nothing more.

Netting Derivatives: Slippery Slope Marred by Opaqueness

Dear oapoki: FYI I have been working with ISDA contracts for a very long time, and have reviewed hundreds of such contracts when closing derivative transaction, though I am not a lawyer by profession. If you have read any of these contracts with precision you will realize the point I am making: that where the shift in the fundamental nature of the contract towards "insurance driven" coverage did not fully capture the risks involved and the counterparty risk. I am not suggesting that such contracts should be abandoned. - Rakesh


On Mar 07 09:00 AM oapoki wrote:

> It is sad to see you guys commenting on these, admittedly complex
> issues, with no idea what you are talking about.
>
> Has any of view taken a look at an ISDA contract? Has any view used
> an ISDA contract in practices? Has any of view wlaked through the
> process of netting in a bankruptcy?
>
> I would simply state that "action talks and BS walks". It is not
> accidental the the derivatives industry has grown to these levels
> - they add value because they enables participants to hedge risks
> - even if people misuse thes einstruments (like everything else).
> In the absence of the ISDA agreement, with its associated actual
> netting (not imagined as the author contends) benefits (as we have
> seen in the case of Lehman), we would have chaos.
>
> ISDA contacts have proven to be extremely robust in the face of extreme
> conditions, and I hate to see what would have happened intheir absence.
>
>
> So be acreful what you are wishing for!

Government Risk Rises: Credit Markets Face Structural Collapse

Dear Ebenezer: You have a point. My point, however, is that the proper recognition of such contracts on balance sheets is vital, now and in the future. The FSAS 157 guidelines are too vague, and subject to subjective interpretations. Many thanks - Rakesh


On Jan 28 12:02 AM Ebenezer wrote:

> Let us not forget a fundamental risk character of the derivative
> contract: No rule/law requires the maintenance of an "appropriate"
> reserve to pay off on the contract if its terms are not met. If the
> seller is unable to pay off a CDS default, for example, the buyer
> has gained nothing. These things are not sold like an insurance policy
> by a regulated insurance company required to maintain certain amounts
> of capital for potential statistically anticipated payouts. Close
> up the seller's company, sorry the premium was paid in salary, commission
> and overhead, and nothing is left to pay on default. Ultimately,
> the loss goes back to the banks loaning the money at the point of
> purchase, the shareholders of the funds investing in the contracts,
> or the issuers themselves. Lord knows, you'd think even the politicians
> could figure this one out...

Government Risk Rises: Credit Markets Face Structural Collapse

Dear thannagan: I am not able to access your blog. Could you send me the details. It is certainly worth looking at the state of bank lending now in more detail, particularly foreclosures etc (per "Oscar" above). Many thanks - R


On Jan 26 12:55 PM thannagan wrote:

> Rakesh - Thanks for the insights. I like your contantly referring
> to the risk-adjusted rates as the best reflection of likely (real
> world) returns on various instruments - and therefore their relative
> actual value. I think the systemic implications (cascading market
> imbalances) are largely related to the lack of sufficient risk-based
> pricing, and net asset values.
>
> I discuss some of these issues realted to bank lending in my blog:
> decisionanalyticsblog....
>
>
> Please continue to publish.

Government Risk Rises: Credit Markets Face Structural Collapse

Dear User 72304. For clarity, we have been pricing CDOs in 2007 and we continue to do so now. I am not offering any wisdom in hindsight, just the facts as they present themselves today and how best can those facts be interpreted. Unlike Dr. Roubini, I am not interested in any doomsday predictions. My interest is highly specific: what short-term trading and arbitrage opportunities are being thrown up today? I trust that provides the clarity you are seeking. Many thanks - Rakesh


On Jan 26 09:06 AM User 72034 wrote:

> "Overall systemic risk matrix" ? Doesn't anyone speak English anymore?
>
> You're advancing the thought that the CDS market is being used to
> drive financial stocks lower and those spreads are affecting the
> creditworthiness of the underlying bonds? You're taking that one
> step further and saying this malaise is starting to affect sovereign
> debt and the US treasury market too? Thanks for the brilliant, but
> hardly fresh insight -----
> The author has a service that prices derivative risk. I wonder what
> his outlook was on CDO's in 2007. It's getting awfully popular to
> be a 'Roubini'-doomsayer -------- now.

Government Risk Rises: Credit Markets Face Structural Collapse

Dear hefaistos: I guess the Fed will start with the secondary market-- it has already indicated that it will do that. What they do if that measure fails is anybody's guess right now. Many thanks - Rakesh


On Jan 26 07:34 AM hefaistos wrote:

> Excellent article!
> I want to add one component. This week there are some big treasury
> auctions, and there is a worry there won't be enough demand from
> foreign investors, leading to higher yields. That's easy to understand
> given the high dollar rate and the low yields, and the prospect for
> inflation in not too distant future. Is it likely that the Fed steps
> in in these upcoming treasury auctions to avoid having higher yields?
> How would such instant monetization be perceived? Or will they act
> only on the secondary market?

Government Risk Rises: Credit Markets Face Structural Collapse

Tom: The traditional definition of default has been the failure to make full payment on maturity dates. But, certain countries (e.g. Argentina & Ecuador) have started offering partial payment along with a new instrument where the principal includes the balance of the principal plus accrued interest. The "liberal definition" I refer this trend towards restructuring. Many thanks - R


On Jan 26 07:23 AM Tom Armistead wrote:

> Rakeesh, could you please explain what is meant by "the relatively
> more liberal definition of sovereign default" gaining momentum.
>
>
> Unless the definitions can get around the problem, it would seem
> that the power of the printing press would make CDS protection on
> the US government meaningless.

Netting Derivatives: Slippery Slope Marred by Opaqueness

Dar rc whalen: Good point re getting rid of traditional ISDA contract formats in favour of insurance-driven documentation. Many thanks- Rakesh


On Jan 07 03:15 PM rc whalen wrote:

> 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

Netting Derivatives: Slippery Slope Marred by Opaqueness

Dear monday1929: I am in the process of assessing the "even if" scenario you talk about. But, whichever way you look at it, the potential losses are staggering indeed. Many thanks - Rakesh


On Jan 07 02:13 PM monday1929 wrote:

> Even if the liars (banks) were acidentally telling the truth here,
> and assuming all counterpaties will make good (an absurd assumption),
> that may leave about 3 trillion in losses for JPM, Citi ie. the U.S.
> taxpayer.