Amicus's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.comuser/277320/comments http://seekingalpha.com/article/99819-establishing-hypotheses-to-test-my-economic-predictions?source=feed#comment-283287 283287
See here:
seekingalpha.com/artic...]]> Wed, 15 Oct 2008 18:00:28 -0400
See here:
seekingalpha.com/artic...]]> http://seekingalpha.com/article/99654-lehman-cds-net-settlement-only-6b-what-does-it-mean?source=feed#comment-282659 282659
Hedge Funds: The Credit Market’s New Paradigm, June, 2007 (last year)
www.rgemonitor.com/blo...]]> Wed, 15 Oct 2008 02:42:48 -0400
Hedge Funds: The Credit Market’s New Paradigm, June, 2007 (last year)
www.rgemonitor.com/blo...]]> http://seekingalpha.com/article/99654-lehman-cds-net-settlement-only-6b-what-does-it-mean?source=feed#comment-282637 282637
From the DTC's note, it appears that their contract registry covers all the major dealers. It doesn't appear to cover any hedge-fund to hedge-fund trading, if there is much volume to that.

Also, from what I could tell, most of the major banks (and by extension, their clients) are covered under the CLS settlement protocol. I did not see AIG on the list .... They are suggesting that "all major institutional players" will be 'on the list' by end of 2009, which, of course, is an ocean of time, with today's worried markets.

www.cls-group.com/Abou...



]]> Wed, 15 Oct 2008 01:26:13 -0400
From the DTC's note, it appears that their contract registry covers all the major dealers. It doesn't appear to cover any hedge-fund to hedge-fund trading, if there is much volume to that.

Also, from what I could tell, most of the major banks (and by extension, their clients) are covered under the CLS settlement protocol. I did not see AIG on the list .... They are suggesting that "all major institutional players" will be 'on the list' by end of 2009, which, of course, is an ocean of time, with today's worried markets.

www.cls-group.com/Abou...



]]> http://seekingalpha.com/article/99815-here-s-the-financial-markets-stabilization-act-we-should-have-seen?source=feed#comment-282505 282505
1. Keep people in their homes - good for the economy, good for a slow home-price adjustment process. Government offers terms to the existing lenders and 50% participation in home price declines. Government offers reasonably close-to-market terms for those with ridiculous sub-prime or alt-a loans.

The worst-case scenario for the mortgage pools behind a CDO, under this plan, is that it is converted into a government-backed, yield-enhanced bond at maybe 16%-22% off of original face value (based on home price declines of 30-40% and 90-95% of LTV assumptions) and with maybe a 4% default rate (those homeowners who cannot meet even the government's reduced terms).

This is a Brady plan for sub-prime and alt-A mortgage debt, focused on those near or at default, that doesn't promise no defaults, keeps people in their homes as long and as much as possible, and shares the burden between lender and borrower, circa 50% in the "workout".

2. No "loan modification". The lender chooses to accept the governments (generous terms) or the risk of a costly, lengthy foreclosure process, as well as the associated home price risk. You can bet that, until house prices stabilize, most of them - well, their servicing agents - will go for the government terms.

4. yes and no. A limited amount of direct assistance, but it is better to get people jobs and to target stimulus to other things, than to start subsidizing lending.

5. absolutely not. For a time, the economy can run with ... less capital.

6. yes, but have no faith that "smart regulation" is ever anything that would make it to a final Congressional Bill.

7. We've done what needs to be done to supervised mortgage lending, but doubling the watch, so to speak, on all these other kinds of abuses, including a look at bankruptcy "relief", is probably a GREAT idea.]]> Tue, 14 Oct 2008 20:17:30 -0400
1. Keep people in their homes - good for the economy, good for a slow home-price adjustment process. Government offers terms to the existing lenders and 50% participation in home price declines. Government offers reasonably close-to-market terms for those with ridiculous sub-prime or alt-a loans.

The worst-case scenario for the mortgage pools behind a CDO, under this plan, is that it is converted into a government-backed, yield-enhanced bond at maybe 16%-22% off of original face value (based on home price declines of 30-40% and 90-95% of LTV assumptions) and with maybe a 4% default rate (those homeowners who cannot meet even the government's reduced terms).

This is a Brady plan for sub-prime and alt-A mortgage debt, focused on those near or at default, that doesn't promise no defaults, keeps people in their homes as long and as much as possible, and shares the burden between lender and borrower, circa 50% in the "workout".

2. No "loan modification". The lender chooses to accept the governments (generous terms) or the risk of a costly, lengthy foreclosure process, as well as the associated home price risk. You can bet that, until house prices stabilize, most of them - well, their servicing agents - will go for the government terms.

4. yes and no. A limited amount of direct assistance, but it is better to get people jobs and to target stimulus to other things, than to start subsidizing lending.

5. absolutely not. For a time, the economy can run with ... less capital.

6. yes, but have no faith that "smart regulation" is ever anything that would make it to a final Congressional Bill.

7. We've done what needs to be done to supervised mortgage lending, but doubling the watch, so to speak, on all these other kinds of abuses, including a look at bankruptcy "relief", is probably a GREAT idea.]]> http://seekingalpha.com/article/99819-establishing-hypotheses-to-test-my-economic-predictions?source=feed#comment-282459 282459
THE DEATH SPIRAL

Events move faster than policy makers can keep up, as a series of further blows to confidence eludes the efforts of a semi-competent Treasury Secretary. Luckily, we have a Fed Charmian who seem really attuned to this, so far (I put up as an exhibit how quickly California's financing needs got off the front page of the papers).

You can make up the list(s) yourselves, because I don't like the game of death spiral.

They include further, dramatic bankruptcies and any kind of unexpected, financial services "dislocation".

Key funding events that fail for mergers that really, really make sense to everyone.

Also, geopolitical events, especially those that spike the price of oil.]]> Tue, 14 Oct 2008 19:12:36 -0400
THE DEATH SPIRAL

Events move faster than policy makers can keep up, as a series of further blows to confidence eludes the efforts of a semi-competent Treasury Secretary. Luckily, we have a Fed Charmian who seem really attuned to this, so far (I put up as an exhibit how quickly California's financing needs got off the front page of the papers).

You can make up the list(s) yourselves, because I don't like the game of death spiral.

They include further, dramatic bankruptcies and any kind of unexpected, financial services "dislocation".

Key funding events that fail for mergers that really, really make sense to everyone.

Also, geopolitical events, especially those that spike the price of oil.]]> http://seekingalpha.com/article/99819-establishing-hypotheses-to-test-my-economic-predictions?source=feed#comment-282440 282440
Where you could be wrong.

The sub-prime meltdown is no longer a financial stocks issue. This problem was just about fully reserved a long while back. At worst, it is a headwind, now, not an anchor. If not, we will vote money for the FDIC and keep putting money into the banks, because neither politician party will be able to change course, politically.

The current bank lock-up is not related to a "crunch" at all, but to uncertainty about derivatives exposures and the anticipated need(s) to deal with that. As such, it will dissipate instantly, once those problems are resolved.

The real credit crunch is occurring at GM and GE, who are losing the grip on their financing arms, for different reasons, both profound both with non-trivial affects to the real economy.

S&P earnings are already down, but a slowdown is already priced into the equity markets, at S&P 1,000.

Obama will win what is left of what we call U.S. democracy.

Oil is a wildcard, still. Unemployment will be fine, if oil keeps coming down, perhaps topping out at 6.5%, especially if a targeted stimulus actually invests in some infrastructure (i.e. one industry that is shedding workers ...).

Consumers will tap on the brakes for Christmastime spending, but by next spring, they will have had enough of belt-tightening. By then, the low interest rates will have just started to work their magic on those banks who are so amazingly profitable at 2.5% funding rates. The Obama "middle class", ill-advised tax cuts will give them ... splendorous optimism.

Housing will take a long time to bottom. Various schemes to prevent an overshoot of housing prices will be tried.

No one will be found responsible and certainly no one will go to jail.

As time goes by, new energy solutions and maybe some public spending on energy efficiency upgrades will mute the impact of a rebound in energy costs, as the recovery turns from remote to likely.

Long yields will... do nothing and everyone will continue to invest in the U.S. The Chinese and India and Brazil will continue to build their position on the Global board-game of RISK.

The wrong regulations will be enacted, in a flurry of inarticulate activity on the Hill, setting the stage for the next crisis, years down the road.
]]> Tue, 14 Oct 2008 18:45:04 -0400
Where you could be wrong.

The sub-prime meltdown is no longer a financial stocks issue. This problem was just about fully reserved a long while back. At worst, it is a headwind, now, not an anchor. If not, we will vote money for the FDIC and keep putting money into the banks, because neither politician party will be able to change course, politically.

The current bank lock-up is not related to a "crunch" at all, but to uncertainty about derivatives exposures and the anticipated need(s) to deal with that. As such, it will dissipate instantly, once those problems are resolved.

The real credit crunch is occurring at GM and GE, who are losing the grip on their financing arms, for different reasons, both profound both with non-trivial affects to the real economy.

S&P earnings are already down, but a slowdown is already priced into the equity markets, at S&P 1,000.

Obama will win what is left of what we call U.S. democracy.

Oil is a wildcard, still. Unemployment will be fine, if oil keeps coming down, perhaps topping out at 6.5%, especially if a targeted stimulus actually invests in some infrastructure (i.e. one industry that is shedding workers ...).

Consumers will tap on the brakes for Christmastime spending, but by next spring, they will have had enough of belt-tightening. By then, the low interest rates will have just started to work their magic on those banks who are so amazingly profitable at 2.5% funding rates. The Obama "middle class", ill-advised tax cuts will give them ... splendorous optimism.

Housing will take a long time to bottom. Various schemes to prevent an overshoot of housing prices will be tried.

No one will be found responsible and certainly no one will go to jail.

As time goes by, new energy solutions and maybe some public spending on energy efficiency upgrades will mute the impact of a rebound in energy costs, as the recovery turns from remote to likely.

Long yields will... do nothing and everyone will continue to invest in the U.S. The Chinese and India and Brazil will continue to build their position on the Global board-game of RISK.

The wrong regulations will be enacted, in a flurry of inarticulate activity on the Hill, setting the stage for the next crisis, years down the road.
]]> http://seekingalpha.com/article/99654-lehman-cds-net-settlement-only-6b-what-does-it-mean?source=feed#comment-282175 282175 ------
It does seem that some are speculating that "A", in this example, might collectively be "lotsa hedge funds", who may not have had sufficient hedges, and consequently, not have the money ...

I'd speculate - not even guess, speculate - that the clearing firms would be on the hook to complete the settlement(s) if their clients fail.

That could be just totally wrong.

Whatever the case, it is unlikely that there will be another auction, since those are geared toward setting a settlement price, not who owes what...]]> Tue, 14 Oct 2008 13:05:03 -0400 ------
It does seem that some are speculating that "A", in this example, might collectively be "lotsa hedge funds", who may not have had sufficient hedges, and consequently, not have the money ...

I'd speculate - not even guess, speculate - that the clearing firms would be on the hook to complete the settlement(s) if their clients fail.

That could be just totally wrong.

Whatever the case, it is unlikely that there will be another auction, since those are geared toward setting a settlement price, not who owes what...]]> http://seekingalpha.com/article/99654-lehman-cds-net-settlement-only-6b-what-does-it-mean?source=feed#comment-282169 282169
I'm not a settlements expert, but you may have calculated the "net" wrong in your example (not just the math).

If A owes B $600 billion and B owes C $540 billion, then the net settlement, I'd *guess* is $600 billion, with $60 paid from A to B and $540 paid from A to C.

There isn't too much evidence to suggest that there was a player out there who wrote up to $600 billion in unhedged CDS, on any one name. So far, it seems only AIG had large, unhedged positions (why else would they suddenly need $85 billion dollars).

The DTC calcualtion *suggests* that, after all the back-and-forth, the net settlement will be a lot smaller than our illustration.

For instance:
C is "flat" as follows:
C owes $8 biliion to B and C is owed $8 billion from A
A is a net payor
A owes $120b to B and B owes $115b to A (net 5 A to B); and
D, a customer, has protection from C
C owes D $1 billion

I'd *guess* that the net settlement, here is $6 billion, with $5 from A-to-B and $1 from C to D.

With luck, A was hedged, so they don't have to come up with $5 billion, but some lesser amount, because of the performance of their hedge.

I wish I had more confidence, but I think that is the right interpretation of the DTC's figure. They list a phone number on their press release. We should call them...]]> Tue, 14 Oct 2008 12:55:21 -0400
I'm not a settlements expert, but you may have calculated the "net" wrong in your example (not just the math).

If A owes B $600 billion and B owes C $540 billion, then the net settlement, I'd *guess* is $600 billion, with $60 paid from A to B and $540 paid from A to C.

There isn't too much evidence to suggest that there was a player out there who wrote up to $600 billion in unhedged CDS, on any one name. So far, it seems only AIG had large, unhedged positions (why else would they suddenly need $85 billion dollars).

The DTC calcualtion *suggests* that, after all the back-and-forth, the net settlement will be a lot smaller than our illustration.

For instance:
C is "flat" as follows:
C owes $8 biliion to B and C is owed $8 billion from A
A is a net payor
A owes $120b to B and B owes $115b to A (net 5 A to B); and
D, a customer, has protection from C
C owes D $1 billion

I'd *guess* that the net settlement, here is $6 billion, with $5 from A-to-B and $1 from C to D.

With luck, A was hedged, so they don't have to come up with $5 billion, but some lesser amount, because of the performance of their hedge.

I wish I had more confidence, but I think that is the right interpretation of the DTC's figure. They list a phone number on their press release. We should call them...]]> http://seekingalpha.com/article/99654-lehman-cds-net-settlement-only-6b-what-does-it-mean?source=feed#comment-281765 281765 -------
It's not clear (to me) how many will.

see here:
www.isda.org/press/pre...]]> Mon, 13 Oct 2008 22:24:10 -0400 -------
It's not clear (to me) how many will.

see here:
www.isda.org/press/pre...]]> http://seekingalpha.com/article/99654-lehman-cds-net-settlement-only-6b-what-does-it-mean?source=feed#comment-281761 281761
The settlement system, via the CLS Bank that is used, is very much developed. It is used for the settlement of F/X, where the notional values soar as high as any in the history of the world ...

I found this primer to share:

www.bis.org/publ/qtrpd...



]]> Mon, 13 Oct 2008 22:22:44 -0400
The settlement system, via the CLS Bank that is used, is very much developed. It is used for the settlement of F/X, where the notional values soar as high as any in the history of the world ...

I found this primer to share:

www.bis.org/publ/qtrpd...



]]> http://seekingalpha.com/article/99653-lehman-s-loss-more-than-200-billion?source=feed#comment-281759 281759
"The special trading session is taking place on Sunday September 14 for OTC derivatives. The purpose of the session is to permit parties to reduce their market risk associated with a potential Lehman Brothers Holding Inc. bankruptcy filing, by entering into transactions with other participants that would fully or partially offset OTC derivatives positions that they have with Lehman. Product classes involved are credit, equity, rates, FX and commodity derivatives."]]> Mon, 13 Oct 2008 22:12:16 -0400
"The special trading session is taking place on Sunday September 14 for OTC derivatives. The purpose of the session is to permit parties to reduce their market risk associated with a potential Lehman Brothers Holding Inc. bankruptcy filing, by entering into transactions with other participants that would fully or partially offset OTC derivatives positions that they have with Lehman. Product classes involved are credit, equity, rates, FX and commodity derivatives."]]> http://seekingalpha.com/article/99653-lehman-s-loss-more-than-200-billion?source=feed#comment-281758 281758 ====
At what price are Lehman's (defaulted) senior bonds trading? Last week's CDS auction suggested that the recovery rate on Lehman "bonds" was not nearly as high as suggested here. That discrepancy could be explainable.

Separately:

"Losses" in your terminology perhaps should be refined. Here's what I have in mind.

True or false: the net economic losses from any defaulted set of bonds is limited to the par-value of the bonds, at the time of default.

Derivatives, such as CDS, are essentially risk-transfers. As such, they net to zero. Put another way, my loss is always someone else's gain.

If Lehman was running a perfectly hedged book of CDS, at the time of bankruptcy, then a netting of the "long" claims against Lehman with the "short" claims, coupled with any cash positions used for hedging or collateral, ought to net zero residual claim.

As you may recall, ISDA held and extra-ordinary derivatives trading session on the Sunday before Lehman went under.

The net results of that, in terms of plucking an incompletely hedged book out of the chain of dominoes, ... is not public, so far as I know.

www.isda.org/press/pre...

]]> Mon, 13 Oct 2008 22:10:22 -0400 ====
At what price are Lehman's (defaulted) senior bonds trading? Last week's CDS auction suggested that the recovery rate on Lehman "bonds" was not nearly as high as suggested here. That discrepancy could be explainable.

Separately:

"Losses" in your terminology perhaps should be refined. Here's what I have in mind.

True or false: the net economic losses from any defaulted set of bonds is limited to the par-value of the bonds, at the time of default.

Derivatives, such as CDS, are essentially risk-transfers. As such, they net to zero. Put another way, my loss is always someone else's gain.

If Lehman was running a perfectly hedged book of CDS, at the time of bankruptcy, then a netting of the "long" claims against Lehman with the "short" claims, coupled with any cash positions used for hedging or collateral, ought to net zero residual claim.

As you may recall, ISDA held and extra-ordinary derivatives trading session on the Sunday before Lehman went under.

The net results of that, in terms of plucking an incompletely hedged book out of the chain of dominoes, ... is not public, so far as I know.

www.isda.org/press/pre...

]]> http://seekingalpha.com/article/99706-moody-s-is-acting-on-private-mortgage-insurers?source=feed#comment-281508 281508
80% probability that these stocks will triple in the next 18 months, I'd guess.]]> Mon, 13 Oct 2008 15:27:30 -0400
80% probability that these stocks will triple in the next 18 months, I'd guess.]]> http://seekingalpha.com/article/99654-lehman-cds-net-settlement-only-6b-what-does-it-mean?source=feed#comment-281507 281507
In your simple two-dealer example, no one delivers $600 billion. All that is deliverable is $6 billion, in cash, from A to B.

The most that could "fail' is the net amount(s).

Six billion is still a lot of cash, but it's not ... fantastically large.]]> Mon, 13 Oct 2008 15:20:20 -0400
In your simple two-dealer example, no one delivers $600 billion. All that is deliverable is $6 billion, in cash, from A to B.

The most that could "fail' is the net amount(s).

Six billion is still a lot of cash, but it's not ... fantastically large.]]> http://seekingalpha.com/article/46274-skeletons-in-the-closet-credit-default-swaps-and-housing?source=feed#comment-281414 281414 -----------
I believe that the figures for sub-prime lending will not bear that conclusion out. On the whole, it did not expand home ownership. Something like 1% of new home buyers were subprime borrowers.

In most markets, it is supply and demand of real-estate that drives the prices, not financing ...]]> Mon, 13 Oct 2008 13:14:40 -0400 -----------
I believe that the figures for sub-prime lending will not bear that conclusion out. On the whole, it did not expand home ownership. Something like 1% of new home buyers were subprime borrowers.

In most markets, it is supply and demand of real-estate that drives the prices, not financing ...]]> http://seekingalpha.com/article/99527-settlement-auction-for-lehman-cds-surprises-behind?source=feed#comment-280986 280986
www.dtcc.com/news/pres...]]> Mon, 13 Oct 2008 00:23:57 -0400
www.dtcc.com/news/pres...]]> http://seekingalpha.com/article/99527-settlement-auction-for-lehman-cds-surprises-behind?source=feed#comment-280970 280970
One wonders if this isn't partly related to the $640,000 quasi-penalty Goldman paid in "adjustments" in the last round (the inside market quote size also was cut in half). If so, this might explain Barclay's bid at 8 that I wondered about aloud above.

Whidbey, I'm certainly not an expert, as some of my questions probably show.

At this time, it's not clear to me how or why the valuation of CDS would be affected by the success or failure of these auctions - don't we theoretically like the price of credit to the probability of default, not to potential recovery rates? Obviously, I need to hit the books.

As for the auction itself, I've been through MarkIt's Auction Primer, to the point that I think I understand the calculations, but not the rationals (except at the big picture level of trying to set a settlement price).

For instance, when I first looked it through, I thought that the approach for any one firm would be to try to "win" in the limit phase about the same face value that was indicated to create the 'open interest' in via the first phase.

In that vein, I'm not sure, right now, what it "means" to offer $141m, but then end up with "winning" bids for $670m. Client orders? Why wouldn't they be part of the initial request, so that the total 'open interest' was larger?

I'm sure there is a logical explanation and it's just too late a night for me to figure it out. G'nite and g'luck.

]]> Mon, 13 Oct 2008 00:03:56 -0400
One wonders if this isn't partly related to the $640,000 quasi-penalty Goldman paid in "adjustments" in the last round (the inside market quote size also was cut in half). If so, this might explain Barclay's bid at 8 that I wondered about aloud above.

Whidbey, I'm certainly not an expert, as some of my questions probably show.

At this time, it's not clear to me how or why the valuation of CDS would be affected by the success or failure of these auctions - don't we theoretically like the price of credit to the probability of default, not to potential recovery rates? Obviously, I need to hit the books.

As for the auction itself, I've been through MarkIt's Auction Primer, to the point that I think I understand the calculations, but not the rationals (except at the big picture level of trying to set a settlement price).

For instance, when I first looked it through, I thought that the approach for any one firm would be to try to "win" in the limit phase about the same face value that was indicated to create the 'open interest' in via the first phase.

In that vein, I'm not sure, right now, what it "means" to offer $141m, but then end up with "winning" bids for $670m. Client orders? Why wouldn't they be part of the initial request, so that the total 'open interest' was larger?

I'm sure there is a logical explanation and it's just too late a night for me to figure it out. G'nite and g'luck.

]]> http://seekingalpha.com/article/99527-settlement-auction-for-lehman-cds-surprises-behind?source=feed#comment-280524 280524
After looking over the Freddie/Fannie anomaly and reading through this, I have an alternative conjecture for your thesis about the "split result" in the last auction, in which the stop in one part of that auction trailed out at 99-something.

Could it be that the derivatives people participating in these auctions are simply ... not as skilled and used to running them as are, say, the primary dealers' desk?

While not inconsistent, per se, they look ... incomplete, in a technical sense of the term. I mean, look at Barclay's bids. Under what theory would bids peter out with *declining* price? Ditto Merrill Lynch. Compare that the Bank of America - their desk are willing to take the same amount of bonds at almost any price - with a bidding strategy like that, one imagines that ISDA should create a sidecar category for "non-compete" bids...

To be charitable, maybe it has to do with the structure of the auctions or the structure of the markets (can't treasury dealers go short in advance of auctions, in order to protect themselves?).

Last, keying off your insight about the impact that the net open interest might have on auction results, can we suggest that the reason that the reason the mid-market average came in below the pre-auction trading prices is that the net open interest was to sell bonds? Just under 60% of the satisfied limit orders were from three firms..

Last, I don't understand the Barclay's limit bids, in relation to the size of their physical settlement request. They put in a physical settlement request of $130m to buy, with a dealer bid at 8, then "won" $1,080m - almost 10x - with a weighted average bid of 9.47 in the limit order. ]]> Sun, 12 Oct 2008 11:43:17 -0400
After looking over the Freddie/Fannie anomaly and reading through this, I have an alternative conjecture for your thesis about the "split result" in the last auction, in which the stop in one part of that auction trailed out at 99-something.

Could it be that the derivatives people participating in these auctions are simply ... not as skilled and used to running them as are, say, the primary dealers' desk?

While not inconsistent, per se, they look ... incomplete, in a technical sense of the term. I mean, look at Barclay's bids. Under what theory would bids peter out with *declining* price? Ditto Merrill Lynch. Compare that the Bank of America - their desk are willing to take the same amount of bonds at almost any price - with a bidding strategy like that, one imagines that ISDA should create a sidecar category for "non-compete" bids...

To be charitable, maybe it has to do with the structure of the auctions or the structure of the markets (can't treasury dealers go short in advance of auctions, in order to protect themselves?).

Last, keying off your insight about the impact that the net open interest might have on auction results, can we suggest that the reason that the reason the mid-market average came in below the pre-auction trading prices is that the net open interest was to sell bonds? Just under 60% of the satisfied limit orders were from three firms..

Last, I don't understand the Barclay's limit bids, in relation to the size of their physical settlement request. They put in a physical settlement request of $130m to buy, with a dealer bid at 8, then "won" $1,080m - almost 10x - with a weighted average bid of 9.47 in the limit order. ]]> http://seekingalpha.com/article/99286-settlement-auction-for-lehman-cds-surprises-ahead?source=feed#comment-279914 279914
Q1: it's already clear in the article and note that this is the first time there was a net buy interest (d'oh).

It's not intuitive why/whether net buy is more or less of a distortion than net sell...

Q1b: the article possibly asserts that "net over-insurance" may produce additional cost, via auction, to the sellers of insurance (not an advantage to the buyer).

Q2: the questions about how to judge this, overall ...remain.]]> Sat, 11 Oct 2008 14:16:03 -0400
Q1: it's already clear in the article and note that this is the first time there was a net buy interest (d'oh).

It's not intuitive why/whether net buy is more or less of a distortion than net sell...

Q1b: the article possibly asserts that "net over-insurance" may produce additional cost, via auction, to the sellers of insurance (not an advantage to the buyer).

Q2: the questions about how to judge this, overall ...remain.]]> http://seekingalpha.com/article/99286-settlement-auction-for-lehman-cds-surprises-ahead?source=feed#comment-279898 279898
Q1: you indicate in #1 that there is a 'likelihood' of a net open interest to buy in a heavily traded CDS set of issues. However, for Lehman, there was a net open interest to sell, as best I can tell.

It's possible that a system could be devised by which the net open interest is known, real-time, yes?

Rather than for accurate / adequate pricing, this would be critical information for regulators, prospectively.

Q1b. Is for clarification. If the net CDS open interest is to buy, don't the CDS writers ultimately push the price up on themselves via the auction process? Put another way, can we interpret your comments to mean that, to the extent an issue is net 'over-insured' in the derivatives market, that is beneficial to the buyer of a CDS, other things being equal, because of how the price is going to be set at default via limit auction?

Q2: you find that the price distortion, via auction process (manipulation possibility) related to the 'net interest to buy/sell', is sufficient large to invalidate the purpose of CDS. Can we further quantify that?

Because of this affect, were holders of CDS compensated 10% less than "ideal" or was it much higher? What is the magnitude of that uncertainty, related to the general uncertainty of what the ultimate recovery-rate would be on the bonds, based on typical auctions and eventual post-bankruptcy recovery?

I ask, because it is well known that cash-and-futures sometimes do not converge and all kinds of other assumptions are ... invalidated, from time to time. So, the question is whether this set of anomalies really was outsized, to some degree.

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Q1: you indicate in #1 that there is a 'likelihood' of a net open interest to buy in a heavily traded CDS set of issues. However, for Lehman, there was a net open interest to sell, as best I can tell.

It's possible that a system could be devised by which the net open interest is known, real-time, yes?

Rather than for accurate / adequate pricing, this would be critical information for regulators, prospectively.

Q1b. Is for clarification. If the net CDS open interest is to buy, don't the CDS writers ultimately push the price up on themselves via the auction process? Put another way, can we interpret your comments to mean that, to the extent an issue is net 'over-insured' in the derivatives market, that is beneficial to the buyer of a CDS, other things being equal, because of how the price is going to be set at default via limit auction?

Q2: you find that the price distortion, via auction process (manipulation possibility) related to the 'net interest to buy/sell', is sufficient large to invalidate the purpose of CDS. Can we further quantify that?

Because of this affect, were holders of CDS compensated 10% less than "ideal" or was it much higher? What is the magnitude of that uncertainty, related to the general uncertainty of what the ultimate recovery-rate would be on the bonds, based on typical auctions and eventual post-bankruptcy recovery?

I ask, because it is well known that cash-and-futures sometimes do not converge and all kinds of other assumptions are ... invalidated, from time to time. So, the question is whether this set of anomalies really was outsized, to some degree.

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