good post. the banks often argue that by creating cds and having them traded they create liquidity for the debt of the underlying company. i always found that hard to believe. to me a buying a loan is going long the balance sheet while receiving a fixed premium. cds is the same, just the underlying company never sees a penny. i either do not buy the argument that financial institutions can diversify the risk away from their balance sheet. if they do not want to have it, why did they buy it in the first place. the ultimate weird thing to me is the synthetic cdo market. take a thousand cds underlyings. throw their ratings and their spreads into a big number cruncher, connect it to a rating agency model and let it run. what you get is a tailor made overfit on the credit market. it is like a trading system with 2000 parameters. worth: nill. i guess many insurance companies have a lot of these on their books ...
the real problem with CDS is that their birth happened before regulators and risk managers became aware of what is going on. many swaps require no down payment whatsoever. this spells infinite leverage. i am quite sure that in the CDO arena, people, even at the risk management centers of the big investment banks, did not know what they were doing until 2006. maybe may 2005, when GM added some volatility to the market. people dramatically over estimated the accuracy of their models in the tail section, particularly in the AAA realm. way too much model confidence. well, time will tell where things are moving from here. i assume the remaining sales guys are already writing the next great pitch book ...
I could never get why sticking these things together made the sum of the parts worth more, they always explained it away with some correlation diversification bullshit.
there is a funny thing about this. overall you are right. the vehicle as such cannot create value. but what is interesting is the fact that the different tranches sold to customers have different value ... and here is money to be made. having said that buyers are usually not aware of the fees they are paying. in a hedge fund you pay 2/20 and this is already regarded as high fees in investment business. cash CDOs are even above that. but since the whole game is about a basis point here and another one there it is not so obvious. well ... that is the true end of the zero sum game.
No it won't , since all the parties in profit are NWO , owners of the Fed like JPM , Rothchilds. There's a press release somewhere that confirms this. I say why no ban all OTC even inter bank forex , put them all on an exchange. Don't see why they should have insider advantage , but then again they are NWO as I have said
There's no reason to not let it collapse, in fact it would be very beneficial. However, most people are simply too easily scared to contemplate that option. What politician is going to tell voters "There's going to be a big recession, but it's for your own good". You think Joe Schmoe is going to buy that? Or will he vote for the guy saying "We're from the government and we're here to help you". The more intellectual/educated types are scared just as easily. Because of the serial bubble blowing and bailouts, few people who are not economic/financial historians have seen a typical financial panic and then rebound. They are all obsessed with the Great Depression, but don't know that it was massive state intervention and refusal to liquidate that made it last so long (just like Japan 1990s).
That doesn't spell infinite leverage, or any at all, or even a single CDS transaction. That would require corporate management to *authorize* trading in the products *before* they knew what was going on, and then to keep trading in them *after* they knew what was going on. Or, alternatively, to have had no clue whatsoever throughout the whole process. Either explanation implies total insanity and criminal levels of negligence and incompetence at the corporate CEO and managerial level. So the real problem is very simple - bad management. It's not the system that was at fault, it was a bunch of clueless retards within it that are to blame. Notice how many banks and financial institutions did not get hit by this crisis - there are plenty that were run soundly by smart people.
In short..... At some price it works...... In the supposed free market...... ................................................. The government does not create value....it simply directs payments.... An interruption in the free market is just that...and when the free market is allowed to operate...the right prices will come about..... .................................................. The US is suffering a case of "Buffett I Told You So....Derivatividis....." Which was found to be malignant and spreading...and when cut out.....leaves a lot slimmer US.....