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Martinghoul

Registered: Jan 2009
Posts: 5641

11-02-11 06:06 PM

Quote from benwm:
Thanks for the replies.

For me, the fact that you have these potentially sizeable CDS hedges in place but not knowing if they will really be paid out in the event of a bond default is problematic, to put it mildly. Like having a spread between two products that are barely correlated but telling your back office the risk is less (because of the related hedge) when the risk is in reality greater.

I think a Greek default on its the own the system could handle - it's not as if a sovereign hasn't defaulted before - but the CDS additional whammy is something we haven't seen before.

We have seen it a few times before. Most prominent case is Argentina in 2001 and the Eternity Global vs Morgan Guaranty/JPM, 2nd District Court.

Point of all this is that sov CDS mkt should have never been allowed to exist the way it does now.

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morganist
Moderator

Registered: Sep 2008
Posts: 3404

11-02-11 06:07 PM

Quote from benwm:

Thanks for the replies.

For me, the fact that you have these potentially sizeable CDS hedges in place but not knowing if they will really be paid out in the event of a bond default is problematic, to put it mildly. Like having a spread between two products that are barely correlated but telling your back/middle office the risk is less (because of the related hedge), enabling you to increase position size in both--> greater risk

I think a Greek default on its the own the system could handle - it's not as if a sovereign hasn't defaulted before - but the CDS additional whammy is something we haven't seen before.

I would like to say that this is partly what I have been saying will happen all a long. The CDS is a type of insurance and I said that pension and insurance functions will not be able to operate due to the retraction in the money supply. This is based the fundamental flaw of the banking system.

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morganist
Moderator

Registered: Sep 2008
Posts: 3404

11-02-11 06:10 PM

Quote from Martinghoul:

We have seen it a few times before. Most prominent case is Argentina in 2001 and the Eternity Global vs Morgan Guaranty/JPM, 2nd District Court.

Point of all this is that sov CDS mkt should have never been allowed to exist the way it does now.

I hate derivatives. I really don't think they should have gone further than forwards, futures and basic options. There is a point were it is not worth having insurance.

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Martinghoul

Registered: Jan 2009
Posts: 5641

11-02-11 06:45 PM

Quote from morganist:
I hate derivatives. I really don't think they should have gone further than forwards, futures and basic options. There is a point were it is not worth having insurance.

There's nothing wrong with derivatives if they're adequately margined and traded on the exchange.

Quote from morganist:
I would like to say that this is partly what I have been saying will happen all a long. The CDS is a type of insurance and I said that pension and insurance functions will not be able to operate due to the retraction in the money supply. This is based the fundamental flaw of the banking system.

Now you're being funny again...

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Random.Capital

Registered: Jan 2005
Posts: 3848

11-02-11 06:50 PM

Quote from Martinghoul:

Point of all this is that sov CDS mkt should have never been allowed to exist the way it does now.

I agree with this. It's a useful tool, but not when treated like a magical fairy wand.

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morganist
Moderator

Registered: Sep 2008
Posts: 3404

11-02-11 06:51 PM

Quote from Martinghoul:

There's nothing wrong with derivatives if they're adequately margined and traded on the exchange.

Now you're being funny again...

No just pushing the boundaries of accepted thought. That is much needed.

It is not that I am being funny. I am just looking at it at a way that does not conform to the current understanding that you follow.

I think you are a clever guy. But I find you have difficulty understanding anything outside the accepted understanding in text books, which are wrong.

Even if derivatives can work, under your regulations, the real world use is not working. There is too much room to abuse them.

Simple derivatives, easy to understand, less room to make problems, lower risk in use. Simple.

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