Gtarras

On Primus Credit Mitigations

thanks. just listened to their call, Jasper said they have experimented with the idea of a collaterized CDPC entity, and had promising results. he even said they were in talks with potential investors, as well as their current clients, as the talks were encouraging. I am especially interested in what their clients said, because the way I see it, the old business models such as AIGs are gone, while the demand to this sort of risk management service is spiking.


On Aug 04 03:48 PM James Cullen wrote:

> There's the possibility for a collateralized CDS seller, which could
> possibly be economic if spreads remain elevated, since it would operate
> with lower leverage than the CDPC. But if that's in the works, it's
> going to involve outside investors, since the stated operating plan
> is to run off PFP and return that capital. So there, you're relying
> not only on the ratings agencies to bless the endeavor, but whatever
> capital allocated to the structured credit markets that still exists
> to want to fund the venture.
>
> Devoting time and resources to building out a collateralized entity
> would also detract from the mission of building out Primus' asset
> management capabilities. There's plenty of institutional skepticism
> about how successful those efforts will be, so I don't know if management
> wants to tackle a second growth avenue at this point.
>
> You're right about the reduced competition finally making new business
> attractive (a theme applicable to a number of areas). I'd like to
> see them raise new capital and seed a collateralized DPC to extend
> the credit platform. But it'll take nine figures worth of fresh capital,
> so I don't know how realistic it is.

On Primus Credit Mitigations

So, what is the future for Primus? do you believe they return to writing new business/generating revenue?

if they do, how profitable do you think it will be? they will have to post CSAs, how much of capital will this be tying up? will they need a high rating?

TIA. i'm actually interested in this stock and this platform. given the upcoming demand for risk management products, and wiped out competition (such as monolines, AIG etc), i 'm curious if there is bright future for Primus.

Can We Insure Against Systemic Risk?

thanks for your views Tom, I am in total agreement with all you said here.

the issue of the systemic insurance is extremely interesting, and has been discussed at various blogs this week. I think it deserves a lot of attention. Simple reason: the backstops that AIG, monolines, SIVs etc were providing to the investors in the past few years are gone. These guarantees, or, in case of SIVs, high rated conduits, were a huge source of liquidity. I am not sure how big exactly, but I would say easily in the single digit trillions of dollars, and maybe even more. My personal, very soft estimate (i have spent ten years in the structured finance area, and dealt with SIVs) is more than $10 trillion of liquidity provided (on aggregate, i am looking at SIVs, guarantors etc).

With this source gone, no wonder money is not flowing through the system. banks are lending but this "shadow banking" source is gone or severely wounded. The FED increased the monetary base, but the money is still not flowing. How will it come back? I dont know. Thats the reason I believe, this topic deserves a lot more attention it is getting.


On Jul 15 05:07 PM Tom Armistead wrote:

> AIG agreed to post collateral and the requirements increased if they
> were downgraded. As of this moment 3% of the bonds they insured
> is not paying, so the losses of 50% they took via Maiden Lane were
> far in excess of what the losses are going to be. They set themselves
> up to guarantee the market value of the securities. MBIA doesn't
> post collateral and is still afloat after taking far more serious
> losses.
>
> Systemic risk if viewed as financial catastrophe risk is difficult
> to insure for the fact that all the losses happen at once which the
> insurance mechanism can't handle. Paying for example bond insurance
> losses over the life of the bond without posting collateral somewhat
> improves the possibility of making it work.
>
> Ultimately society as a whole, ie big government, is responsible
> to pick up the pieces and get things rolling again in the event of
> a financial catastrophe. Long-term it might be more effective to
> admit this, set up an FDIC like mechanism Depression type loss scenarios.
> The premiums or taxes would have to be segregated and accumulated
> over time to pay for the big one, or the government could simply
> print money to fund it. The premiums if proportionate to the systemic
> risk created by the activity would be a deterrant to excessive risk
> taking.
>
> Since the government is the insurer of systemic risk it makes sense
> to formalize the arrangement and specify how it works in advance,
> rather than making it up like Paulson as he cruised around with his
> Bazooka picking the winners and losers.

AIG's Cassano: The Man Who Crashed the World?

other than AIG there were others who participated in this "shadow banking" liquidity provision for the super senior tranches of CDOs of ABS. Monolines, SIVs, multi-lines insurers, pension funds. Many banks also kept these pieces on their books, foolishly believing they were super safe.


On Jul 15 04:33 PM Gtarras wrote:

> "FP people he talked to “were fairly certain that if it hadn’t been
> for A.I.G. F.P. the subprime-mortgage machine might never have been
> built, and the financial crisis might never have happened.”
>
> Michael Lewis is sensational! Sensational journalist, that is. apparently,
> it sells.

AIG's Cassano: The Man Who Crashed the World?

"FP people he talked to “were fairly certain that if it hadn’t been for A.I.G. F.P. the subprime-mortgage machine might never have been built, and the financial crisis might never have happened.”

Michael Lewis is sensational! Sensational journalist, that is. apparently, it sells.

Can We Insure Against Systemic Risk?

Well, Michael Lewis.... I'd be very careful believing what he has to say, as he prefers sensational journalism to fact checking.

I too was under impression that AIG was not offering to post collateral, but the latest facts show that they were (for example, google AIG internal memo, which resurfaced couple of weeks ago, where they specifically say how much they'd have to post for each of their counterparty). When I saw it, I could not believe myself. I was under impression that their problems were due to the downgrade (they'd have to post as well), but it looks like they were even more suicidal.


On Jul 15 01:43 PM Fund Insider wrote:

> Acccording to Michael Lews (a prolific writer on Wall Street greed)
>
> AIG went against industry practice and refused to post collateral
> to dealers when they first started trading CDS (selling insurance).
>
> It is this lack of collateral obligation that allowed them to run
> amok writing unlimited amounts of insurance, they didn't need any
> collateral at hand to fund them. At some point they had to do it,
> but could only do so with govt help to fund the collateral payments
> to Goldman, etc.
>
> Interesting read
> www.vanityfair.com/pol...
>
> On Jul 15 01:26 PM Gtarras wrote:

Can We Insure Against Systemic Risk?

Here are two major points nobody mentions:

1. AIG was brought down not by the REAL losses on these tranches, but by mark-to-market SWINGS. It was offering to post collateral through a mechanism called CSA, if prices went too far against the protection buyer. Other players like AIG (monolines), did not offer these margin posting service.

2. It is still not clear whether the real losses that AIG will suffer will be enough to wipe out its capital. For example, MBIA seems to be ok in this regard.

The CSA offer from AIG was a suicide. Their exposures were close to $1 billion in each deal, with VERY ILLIQUID deals 5-8 years in maturity. With this type of setting, if a price on your tranche jumps from 10 bps to 100 bps, you get slaughtered. (they clearly thought it would not happen.)

For example, if you sell 5y protection, $10 mill exposure on a liquid name and things go against you, i doubt you'd suffer that much.

Thats the reason its critical that this systemic risk issue is brought up. NOBODY is big enough to withstand this type of hit (except the govt). Of course, there was a reason the banks wanted to unload these tranches- to free up capital. Easy fix would be to make changes in Basel to view these types of exposures as "capital light".

Questioning Conventional Wisdom on Credit Default Swaps

one more thing to add to that: increase funding reuirements for protection seller to avoid AIG type of fiasco


On Jun 26 02:40 PM Gtarras wrote:

> "I know the high-level answer (in fact, I already said it): firms
> have unique hedging needs."
>
> Not sure why this is not good enough explanation. Most of this noise
> is because it is hard to customize securitized products, having worked
> with them for 15 years, i will testify to that. Securitization, meanwhile
> accounted for two-thirds of money flow in the US. If securitization
> is not restored, the economy will not recover. Think about it. CP
> and auction paper funding programs are DEAD. And they were huge.
> We need to bring back to life ABS, CDOS etc. They will be critical,
> especially now that the reserve requirements for the banks will be
> increased.
>
> So why not introduce this solution: Allow OTC trading for only certain
> types of credit products (for instance, customized tranches). In
> addition, allow purchase of a CDS contract only if the asset is already
> on purchaser's books.

Questioning Conventional Wisdom on Credit Default Swaps

"I know the high-level answer (in fact, I already said it): firms have unique hedging needs."

Not sure why this is not good enough explanation. Most of this noise is because it is hard to customize securitized products, having worked with them for 15 years, i will testify to that. Securitization, meanwhile accounted for two-thirds of money flow in the US. If securitization is not restored, the economy will not recover. Think about it. CP and auction paper funding programs are DEAD. And they were huge. We need to bring back to life ABS, CDOS etc. They will be critical, especially now that the reserve requirements for the banks will be increased.

So why not introduce this solution: Allow OTC trading for only certain types of credit products (for instance, customized tranches). In addition, allow purchase of a CDS contract only if the asset is already on purchaser's books.

Mortgage Industry Organization's Members Responsible for Good Portion of Default Losses

On a second thought, I think you are short these companies (disclosure, I have no position in them), and now are talking your book...

To be frank, I simply cant stand this typical WallStreet sharkness..What you are really attacking is LTV>80 loans, not MIs, than enable only 15% off all LTVs>80. SO, Bruce, why dont you just write an article about why highly levered loans are bad for the neighborhoods, instead of talking your book???

Mortgage Industry Organization's Members Responsible for Good Portion of Default Losses

Jeez, Bruce, you are overboard with this. MIs are to be blamed for this mess? PLEAAASE!!!

The fact that these companies have been profitable throughout their 30-50 years in business (except for 2006-07 vintages) tells you that their model is not flawed. Just look at what happens 2008 vintage losses for FHA. FHA will have to be bailed by the taxpayer, whereas MIs are actually back to being profitable again in 08. Why? Because private business is always "smarter" than govt. If you dont agree with LTV >80 loans, then its a different proposition, lets lobby Congress to ban these loans. They have been around for ever though, and the fact that MIs have always made money except for the 06-07 speaks volumes.

But again, your holding MIs responsible is ludicrous. jezz.

Seven Uncomfortable Predictions for the Economy

Oh no, not another fear monger. It is so in fashion, it is getting boring.

'Fair-Value' Accounting Isn't Fair

Great stuff. Not enough of it out there.I have been arguing with colleagues about it a lot. My issue is that not many people get that. Not because they are stupid, its just not their area of expertise. I build models. I know that when you plug-in "fear market" assumptions (already horribly skewed) into CDO or ABS model, you get "fear squared" or even "cubed" out of it.. How bad is that? Really bad... This way you scare a hell lot of people... and guess what? Finance is all about trust...When you scare people, there is no trust to speak of.. Think Lehman and Bear... And Citi...

About accountants and auditors.. Its their azzes on the line.. Do you think they will force you to be more or less conservative? and so this is what we get.. scared public, which is clueless how the write downs are calculated.. but hey, auditors signed -off on them, right? yea.. do you think they have a clue themselves? they are not stupid, no... i have no clue about most of what they do... but, i know they dont fully get it, and force you to make it look even worse that "fear cubed"... and try to argue with your auditor...

William Ackman of Pershing Square: We Erred in Buying AIG Post-Bailout

Mt Ackman shorts MBI, that has exactly same issues as AIG, namely subprime ABS CDOs, and then screams at every corner how bad MBI book is... He tried to do exact same thing back in 2001, but was not LUCKY back then... AIG has SAME book problems as MBI, and yet Mr Ackman, after loading heavily on its stock, promotes its stock heavily... What does it tell you of Mr Ackman, his "acumen" and whether anybody in his right mind should ever pay attention to his self-promoting rubbish... ???