tag:blogger.com,1999:blog-5880610.post1006090067881245716..comments2024-01-13T18:57:18.243-05:00Comments on Information Processing: Gillian Tett at LSESteve Hsuhttp://www.blogger.com/profile/02428333897272913660noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-5880610.post-7743745011455808992009-05-27T19:33:33.095-04:002009-05-27T19:33:33.095-04:00Obviously CDS are insurance policies. The problem...Obviously CDS are insurance policies. The problem isn't the idea of "insuring" credit defaults. The problem is that in writing a lot of that kind of insurance the insurer can't seek safety in diversification. Property insurers can write policies on the Gulf coast and then diversify away risk by writing policies on ranches in Montana. Hurricanes just don't hit both places the same year (if Sethhttps://www.blogger.com/profile/16486234948199900568noreply@blogger.comtag:blogger.com,1999:blog-5880610.post-82377128760779325712009-05-24T04:46:22.986-04:002009-05-24T04:46:22.986-04:00A CDS is a put option with strike price the face v...A CDS is a put option with strike price the face value.<br /><br />How is a put not insurance?Ian Smithhttps://www.blogger.com/profile/06837467954881003505noreply@blogger.comtag:blogger.com,1999:blog-5880610.post-79121675003142544542009-05-23T17:32:07.666-04:002009-05-23T17:32:07.666-04:00From the first excerpt: But when they were doing t...From the first excerpt: <I>But when they were doing these deals for other banks, the question of reserve capital became more important – the others were mainly interested in cutting their reserve requirements.</I><BR>There's a very prosaic term to describe all this: "fraud". More profitable investments carry a higher risk - this is called "spread." These derivatives allowed banks to earn the zielhttps://www.blogger.com/profile/03669293146969638930noreply@blogger.comtag:blogger.com,1999:blog-5880610.post-13284762770587392602009-05-22T15:25:59.669-04:002009-05-22T15:25:59.669-04:00"The number of defaults required to set off such a..."The number of defaults required to set off such a chain reaction was a vexing unknown. "<br /><br />Here's where I disagree with Tett and a lot of others. It is not that the CDSs actually defaulted. What happened was that the rise in the foreclosure rate led to uncertainty about the solvency about CDSs, and this led to credit downgrades and calls for more capital. <br /><br />What then followed Donald Pretarihttps://www.blogger.com/profile/14493535232127084725noreply@blogger.comtag:blogger.com,1999:blog-5880610.post-53412992248090139712009-05-22T08:49:03.198-04:002009-05-22T08:49:03.198-04:00"and working out how they might develop among any ..."and working out how they might develop among any basket of companies is fiendishly complex"<br /><br />A better description would be "impossible to model", but there is a tacit assumption among quants that there is always a model.<br /><br />Still ignored is what Soros calls "reflexivity". That is, the performance of loans/bonds depends on future lending/underwriting.Ian Smithhttps://www.blogger.com/profile/06837467954881003505noreply@blogger.com