Housing History Repeating Itself?

[Toddsterpatriot]

and then of course you have secondary markets for CDS contracts which is where opaque CDS risk chains come into the picture (A buys a CDS contract from B who then sells it to C who then sells it to D, if D can't pay off then everybody up the chain takes it in the rear) .

Pretty sure they didn't work that way in 2007-2008.
All swaps were between the 2 parties. A couldn't sell the contract he signed with B to C, A would have to write a new contract with C.....no netting.

Unfortunately you're mistaken, CDS Contracts were regularly sold off so the underwriters could move risk off their books, they're financial assets after all and thus they're "tradeable", in fact it was common for speculators to buy both the underlying debt and the CDS contract for the debt if they reasoned that the debt was likely to default (so they could get the risk premiums on discounted debt) as well as the inverse case where speculators buying high premium CDS contracts and the underlying risky debt that they reasoned wouldn't default (same reason as the inverse case). Along with the above you also had a proliferation of naked CDS positions which is essentially just another synthetic derivative bet by speculators on assets they didn't own thus magnifying the negative effects of credit disruptions if the bets went bad.

The bigger problem however wasn't the buying and selling of contracts (since that is a two party risk transfer), it was the situation you described where the original underwriter insures the CDS risk (with a new contract) to a third party and then that third party does the same thing with a fourth party and so on, this creates an opaque risk chain; its difficult to calculate actual risk because it's hard to determine who all the parties in the chain are let alone which ones are the "weak link(s)"; there is a cascading effect if any of the parties involved are unable to pay off in the event that the original debt defaults.

Unfortunately you're mistaken, CDS Contracts were regularly sold off so the underwriters could move risk off their books, they're financial assets after all and thus they're "tradeable",

No. They're contracts between 2 parties. Not standardized, not nettable and not tradeable.

You need to do more homework because you're wrong, CDS are credit derivatives and were and are still bought and sold (traded), just like a myriad of other types of derivative contracts.

You need to do more homework because you're wrong, CDS are credit derivatives and were and are still bought and sold (traded),

If Goldman wrote a CDS contract with Merrill, Merrill could not liquidate the position by selling it to Morgan.

Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.

If Merrill wrote an offsetting contract with Morgan, Merrill would have 2 contracts on the books, not zero contracts.

Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?

just like a myriad of other types of derivative contracts

Don't confuse these contracts with exchange traded options and futures.

I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable, which leads one to conclude that you think that trades only occur on public exchanges.

Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.

Let's say you wanted to buy a CDS to protect your mortgage portfolio.
You get a quote from Goldman Sachs and a quote from Joe's Discount CDS Shack.
Joe will give you a better deal, but he only has $10,000 in capital and has only been in business since March.

You decide to go with Goldman.
6 months later, Goldman gets bearish on your portfolio, decides to trade your contract to Joe.
Should you be worried? A contract is a contract.

Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?

Who said it was? In my scenario, does Merrill have zero risk? Why?

Don't confuse these contracts with exchange traded options and futures.

I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable

Only because the 2 party contracts aren't.

which leads one to conclude that you think that trades only occur on public exchanges.

If you want a CDS contract that is standardized, nettable and tradable, like a futures or options contract on an exchange, you'd have to find one on an exchange with a clearing corporation. AFAIK, there are none currently available.
It's only fairly recently that CDS contracts have been nettable between the 2 original parties.

 

[NightFox]

Unfortunately you're mistaken, CDS Contracts were regularly sold off so the underwriters could move risk off their books, they're financial assets after all and thus they're "tradeable", in fact it was common for speculators to buy both the underlying debt and the CDS contract for the debt if they reasoned that the debt was likely to default (so they could get the risk premiums on discounted debt) as well as the inverse case where speculators buying high premium CDS contracts and the underlying risky debt that they reasoned wouldn't default (same reason as the inverse case). Along with the above you also had a proliferation of naked CDS positions which is essentially just another synthetic derivative bet by speculators on assets they didn't own thus magnifying the negative effects of credit disruptions if the bets went bad.

The bigger problem however wasn't the buying and selling of contracts (since that is a two party risk transfer), it was the situation you described where the original underwriter insures the CDS risk (with a new contract) to a third party and then that third party does the same thing with a fourth party and so on, this creates an opaque risk chain; its difficult to calculate actual risk because it's hard to determine who all the parties in the chain are let alone which ones are the "weak link(s)"; there is a cascading effect if any of the parties involved are unable to pay off in the event that the original debt defaults.

Unfortunately you're mistaken, CDS Contracts were regularly sold off so the underwriters could move risk off their books, they're financial assets after all and thus they're "tradeable",

No. They're contracts between 2 parties. Not standardized, not nettable and not tradeable.

You need to do more homework because you're wrong, CDS are credit derivatives and were and are still bought and sold (traded), just like a myriad of other types of derivative contracts.

You need to do more homework because you're wrong, CDS are credit derivatives and were and are still bought and sold (traded),

If Goldman wrote a CDS contract with Merrill, Merrill could not liquidate the position by selling it to Morgan.

Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.

If Merrill wrote an offsetting contract with Morgan, Merrill would have 2 contracts on the books, not zero contracts.

Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?

just like a myriad of other types of derivative contracts

Don't confuse these contracts with exchange traded options and futures.

I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable, which leads one to conclude that you think that trades only occur on public exchanges.

Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.

Let's say you wanted to buy a CDS to protect your mortgage portfolio.
You get a quote from Goldman Sachs and a quote from Joe's Discount CDS Shack.
Joe will give you a better deal, but he only has $10,000 in capital and has only been in business since March.

You decide to go with Goldman.
6 months later, Goldman gets bearish on your portfolio, decides to trade your contract to Joe.
Should you be worried? A contract is a contract.

Should I be worried, MAYBE but unless non-transferrable is stipulated in the contract my options are to the contract (stop paying the premiums), start handing over my premiums to Joe's Discount CDS Shack or sell my end of the contract to somebody else that has more faith in Joe's than I do, in either case the fact that Joe's Discount CDS Shack doesn't have the reserves to cover in the event of default puts them in legal jeopardy so I'd imagine Joe will be out looking for a buyer or underwriter .

Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?

Who said it was? In my scenario, does Merrill have zero risk? Why?

Merrill has zero risk in this scenario if the liability risk for the contract is moved off their books, either by outright selling the contract or having the risk underwritten by somebody else.

I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable

Only because the 2 party contracts aren't.

Aren't what? Saleable?How many parties are involved in a mortgage contract?

If you want a CDS contract that is standardized, nettable and tradable, like a futures or options contract on an exchange, you'd have to find one on an exchange with a clearing corporation. AFAIK, there are none currently available.
It's only fairly recently that CDS contracts have been nettable between the 2 original parties.

That was the part of the problem, CDS Contracts were not "standarized" or regulated, they were private party contracts which means that they can be bought, sold or underwritten based on the terms of the specific contract language.

If you had $100 million in bonds that you wanted to insure and you come to me to buy a swap and based on my risk assessment I come up with a figure of $1 million a year in risk premium, we could write that contract, if we assume there is no non-transferability clause (which wouldn't be in either one of our interests) and I decide that I have more attractive places to put those reserves into play then I can:

a. sell the contract outright to somebody else for X dollars, they assume the risk they get your premiums, I take whatever profit I made on the sale and I'm off to the next investment
b. Arbitrage the premium by going to another underwriter to insure those bonds (which you still own) at a risk premium of $1 million a year - X, X is profit to me, the risk is now on the books of whomever I bought the swap from they then can go out and get another underwriter to underwrite that risk and so on......

And you can do the same things.

Heck I don't even have to write a contract with you, anybody can go out and buy a swap on the bonds you own without you ever being involved and I can sell that swap to anybody that wants to buy it.

It's all a casino.

 

[Toddsterpatriot]

Unfortunately you're mistaken, CDS Contracts were regularly sold off so the underwriters could move risk off their books, they're financial assets after all and thus they're "tradeable",

No. They're contracts between 2 parties. Not standardized, not nettable and not tradeable.

You need to do more homework because you're wrong, CDS are credit derivatives and were and are still bought and sold (traded), just like a myriad of other types of derivative contracts.

You need to do more homework because you're wrong, CDS are credit derivatives and were and are still bought and sold (traded),

If Goldman wrote a CDS contract with Merrill, Merrill could not liquidate the position by selling it to Morgan.

Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.

If Merrill wrote an offsetting contract with Morgan, Merrill would have 2 contracts on the books, not zero contracts.

Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?

just like a myriad of other types of derivative contracts

Don't confuse these contracts with exchange traded options and futures.

I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable, which leads one to conclude that you think that trades only occur on public exchanges.

Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.

Let's say you wanted to buy a CDS to protect your mortgage portfolio.
You get a quote from Goldman Sachs and a quote from Joe's Discount CDS Shack.
Joe will give you a better deal, but he only has $10,000 in capital and has only been in business since March.

You decide to go with Goldman.
6 months later, Goldman gets bearish on your portfolio, decides to trade your contract to Joe.
Should you be worried? A contract is a contract.

Should I be worried, MAYBE but unless non-transferrable is stipulated in the contract my options are to the contract (stop paying the premiums), start handing over my premiums to Joe's Discount CDS Shack or sell my end of the contract to somebody else that has more faith in Joe's than I do, in either case the fact that Joe's Discount CDS Shack doesn't have the reserves to cover in the event of default puts them in legal jeopardy so I'd imagine Joe will be out looking for a buyer or underwriter .

Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?

Who said it was? In my scenario, does Merrill have zero risk? Why?

Merrill has zero risk in this scenario if the liability risk for the contract is moved off their books, either by outright selling the contract or having the risk underwritten by somebody else.

I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable

Only because the 2 party contracts aren't.

Aren't what? Saleable? How many parties are involved in a mortgage contract?

If you want a CDS contract that is standardized, nettable and tradable, like a futures or options contract on an exchange, you'd have to find one on an exchange with a clearing corporation. AFAIK, there are none currently available.
It's only fairly recently that CDS contracts have been nettable between the 2 original parties.

That was the part of the problem, CDS Contracts were not "standarized" or regulated, they were private party contracts which means that they can be bought, sold or underwritten based on the terms of the specific contract language.

If you had $100 million in bonds that you wanted to insure and you come to me to buy a swap and based on my risk assessment I come up with a figure of $1 million a year in risk premium, we could write that contract, if we assume there is no non-transferability clause (which wouldn't be in either one of our interests) and I decide that I have more attractive places to put those reserves into play then I can:

a. sell the contract outright to somebody else for X dollars, they assume the risk they get your premiums, I take whatever profit I made on the sale and I'm off to the next investment
b. Arbitrage the premium by going to another underwriter to insure those bonds (which you still own) at a risk premium of $1 million a year - X, X is profit to me, the risk is now on the books of whomever I bought the swap from they then can go out and get another underwriter to underwrite that risk and so on......

And you can do the same things.

Heck I don't even have to write a contract with you, anybody can go out and buy a swap on the bonds you own without you ever being involved and I can sell that swap to anybody that wants to buy it.

It's all a casino.

Should I be worried, MAYBE but unless non-transferrable is stipulated in the contract

Unless transferrable is stipulated, it's not. And it never was.

my options are to the contract (stop paying the premiums),

Your swap is suddenly in the money.

start handing over my premiums to Joe's Discount CDS Shack

When Goldman sold the contract, you kept paying Goldman?

the fact that Joe's Discount CDS Shack doesn't have the reserves to cover in the event of default puts them in legal jeopardy so I'd imagine Joe will be out looking for a buyer or underwriter .

All your covered mortgages defaulted, who is going to give Joe the money to cover them?
Sounds like you're screwed.

Merrill has zero risk in this scenario if the liability risk for the contract is moved off their books,

Signing an offsetting contract with a third party did not move the risk off your books, it just set up the opposite risk with someone else.

If Merrill has to pay off Goldman, but Morgan defaulted, why does Merrill have zero risk?

Aren't what?

The 2 party, you and Goldman, contract you signed is not transferrable.

Saleable?

If Goldman could sell it, that would be a transfer.

How many parties are involved in a mortgage contract?

We're talking about the CDS, not any mortgage.

That was the part of the problem, CDS Contracts were not "standarized" or regulated

Or transferrable or nettable.

they were private party contracts which means that they can be bought, sold or underwritten based on the terms of the specific contract language.

The terms of the contract never said they could be sold or transferred.

If you had $100 million in bonds that you wanted to insure and you come to me to buy a swap and based on my risk assessment I come up with a figure of $1 million a year in risk premium, we could write that contract, if we assume there is no non-transferability clause (which wouldn't be in either one of our interests)

You're wrong. If I did a trade with Goldman because I felt secure with their deep pockets, it is definitely not in my interest that they could transfer their risk to Joe's CDS Shack.

Do some research. This was a huge issue before the crash.
They talked about standardizing these contracts and making them exchange tradeable.
They never did.

 

[NightFox]

You need to do more homework because you're wrong, CDS are credit derivatives and were and are still bought and sold (traded), just like a myriad of other types of derivative contracts.

You need to do more homework because you're wrong, CDS are credit derivatives and were and are still bought and sold (traded),

If Goldman wrote a CDS contract with Merrill, Merrill could not liquidate the position by selling it to Morgan.

Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.

If Merrill wrote an offsetting contract with Morgan, Merrill would have 2 contracts on the books, not zero contracts.

Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?

just like a myriad of other types of derivative contracts

Don't confuse these contracts with exchange traded options and futures.

I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable, which leads one to conclude that you think that trades only occur on public exchanges.

Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.

Let's say you wanted to buy a CDS to protect your mortgage portfolio.
You get a quote from Goldman Sachs and a quote from Joe's Discount CDS Shack.
Joe will give you a better deal, but he only has $10,000 in capital and has only been in business since March.

You decide to go with Goldman.
6 months later, Goldman gets bearish on your portfolio, decides to trade your contract to Joe.
Should you be worried? A contract is a contract.

Should I be worried, MAYBE but unless non-transferrable is stipulated in the contract my options are to the contract (stop paying the premiums), start handing over my premiums to Joe's Discount CDS Shack or sell my end of the contract to somebody else that has more faith in Joe's than I do, in either case the fact that Joe's Discount CDS Shack doesn't have the reserves to cover in the event of default puts them in legal jeopardy so I'd imagine Joe will be out looking for a buyer or underwriter .

Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?

Who said it was? In my scenario, does Merrill have zero risk? Why?

Merrill has zero risk in this scenario if the liability risk for the contract is moved off their books, either by outright selling the contract or having the risk underwritten by somebody else.

I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable

Only because the 2 party contracts aren't.

Aren't what? Saleable? How many parties are involved in a mortgage contract?

If you want a CDS contract that is standardized, nettable and tradable, like a futures or options contract on an exchange, you'd have to find one on an exchange with a clearing corporation. AFAIK, there are none currently available.
It's only fairly recently that CDS contracts have been nettable between the 2 original parties.

That was the part of the problem, CDS Contracts were not "standarized" or regulated, they were private party contracts which means that they can be bought, sold or underwritten based on the terms of the specific contract language.

If you had $100 million in bonds that you wanted to insure and you come to me to buy a swap and based on my risk assessment I come up with a figure of $1 million a year in risk premium, we could write that contract, if we assume there is no non-transferability clause (which wouldn't be in either one of our interests) and I decide that I have more attractive places to put those reserves into play then I can:

a. sell the contract outright to somebody else for X dollars, they assume the risk they get your premiums, I take whatever profit I made on the sale and I'm off to the next investment
b. Arbitrage the premium by going to another underwriter to insure those bonds (which you still own) at a risk premium of $1 million a year - X, X is profit to me, the risk is now on the books of whomever I bought the swap from they then can go out and get another underwriter to underwrite that risk and so on......

And you can do the same things.

Heck I don't even have to write a contract with you, anybody can go out and buy a swap on the bonds you own without you ever being involved and I can sell that swap to anybody that wants to buy it.

It's all a casino.

Should I be worried, MAYBE but unless non-transferrable is stipulated in the contract

Unless transferrable is stipulated, it's not. And it never was.

my options are to the contract (stop paying the premiums),

Your swap is suddenly in the money.

start handing over my premiums to Joe's Discount CDS Shack

When Goldman sold the contract, you kept paying Goldman?

the fact that Joe's Discount CDS Shack doesn't have the reserves to cover in the event of default puts them in legal jeopardy so I'd imagine Joe will be out looking for a buyer or underwriter .

All your covered mortgages defaulted, who is going to give Joe the money to cover them?
Sounds like you're screwed.

Merrill has zero risk in this scenario if the liability risk for the contract is moved off their books,

Signing an offsetting contract with a third party did not move the risk off your books, it just set up the opposite risk with someone else.

If Merrill has to pay off Goldman, but Morgan defaulted, why does Merrill have zero risk?

Aren't what?

The 2 party, you and Goldman, contract you signed is not transferrable.

Saleable?

If Goldman could sell it, that would be a transfer.

How many parties are involved in a mortgage contract?

We're talking about the CDS, not any mortgage.

That was the part of the problem, CDS Contracts were not "standarized" or regulated

Or transferrable or nettable.

they were private party contracts which means that they can be bought, sold or underwritten based on the terms of the specific contract language.

The terms of the contract never said they could be sold or transferred.

If you had $100 million in bonds that you wanted to insure and you come to me to buy a swap and based on my risk assessment I come up with a figure of $1 million a year in risk premium, we could write that contract, if we assume there is no non-transferability clause (which wouldn't be in either one of our interests)

You're wrong. If I did a trade with Goldman because I felt secure with their deep pockets, it is definitely not in my interest that they could transfer their risk to Joe's CDS Shack.

Do some research. This was a huge issue before the crash.
They talked about standardizing these contracts and making them exchange tradeable.
They never did.

*sigh* ya know you should really learn how to use BBCode for quoting, it's easier for you and easier for your reader.

Anywho, nice chatting with you ToddsterPatriot, you always seem to have an interesting take on things but to put this question to rest.

"Since swaps are highly customized and not easily standardized, the swap market is considered an over-the-counter market. That means swap contracts cannot typically be easily traded on an exchange (however there are swap indexes available on some public exchanges).


However, that does not mean that swaps are illiquid instruments, quite the contrary. The swap market is one of the largest and most liquid marketplaces in the world, with many willing participants in most cases ready to take either side of a contract to either hedge some sort of exposure or for speculation. It has been estimated that in 2009 the notional amount outstanding in over-the-counter interest rate swaps was nearing $350 trillion."

For your researching pleasure....
An In-Depth Look at The Swap Market
Credit Default Swap - CDS

Have a nice day

 

[my2¢]

Could Trump’s Tax Plan Upend the Housing Market?...

Personally I've always thought the mortgage interest deduction was oversold as a selling point for homeownership and so my guess its effect on housing will be minimal. I've put extra money towards the mortgage and got it paid off but sometimes the dough went to investments without much regard to interest tax savings.

If the higher standard deduction has any impact I'll say it'll be more towards charitable giving.

As it is currently planned, the loss of state tax deduction will hit hardest on New Yorkers and residents of other big tax states. I don't fell sorry for them. But one group I have concern about are those families that due to circumstances are forced to pay extremely high medical costs.

 

[Toddsterpatriot]

You need to do more homework because you're wrong, CDS are credit derivatives and were and are still bought and sold (traded),

If Goldman wrote a CDS contract with Merrill, Merrill could not liquidate the position by selling it to Morgan.

Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.

If Merrill wrote an offsetting contract with Morgan, Merrill would have 2 contracts on the books, not zero contracts.

Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?

just like a myriad of other types of derivative contracts

Don't confuse these contracts with exchange traded options and futures.

I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable, which leads one to conclude that you think that trades only occur on public exchanges.

Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.

Let's say you wanted to buy a CDS to protect your mortgage portfolio.
You get a quote from Goldman Sachs and a quote from Joe's Discount CDS Shack.
Joe will give you a better deal, but he only has $10,000 in capital and has only been in business since March.

You decide to go with Goldman.
6 months later, Goldman gets bearish on your portfolio, decides to trade your contract to Joe.
Should you be worried? A contract is a contract.

Should I be worried, MAYBE but unless non-transferrable is stipulated in the contract my options are to the contract (stop paying the premiums), start handing over my premiums to Joe's Discount CDS Shack or sell my end of the contract to somebody else that has more faith in Joe's than I do, in either case the fact that Joe's Discount CDS Shack doesn't have the reserves to cover in the event of default puts them in legal jeopardy so I'd imagine Joe will be out looking for a buyer or underwriter .

Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?

Who said it was? In my scenario, does Merrill have zero risk? Why?

Merrill has zero risk in this scenario if the liability risk for the contract is moved off their books, either by outright selling the contract or having the risk underwritten by somebody else.

I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable

Only because the 2 party contracts aren't.

Aren't what? Saleable? How many parties are involved in a mortgage contract?

If you want a CDS contract that is standardized, nettable and tradable, like a futures or options contract on an exchange, you'd have to find one on an exchange with a clearing corporation. AFAIK, there are none currently available.
It's only fairly recently that CDS contracts have been nettable between the 2 original parties.

That was the part of the problem, CDS Contracts were not "standarized" or regulated, they were private party contracts which means that they can be bought, sold or underwritten based on the terms of the specific contract language.

If you had $100 million in bonds that you wanted to insure and you come to me to buy a swap and based on my risk assessment I come up with a figure of $1 million a year in risk premium, we could write that contract, if we assume there is no non-transferability clause (which wouldn't be in either one of our interests) and I decide that I have more attractive places to put those reserves into play then I can:

a. sell the contract outright to somebody else for X dollars, they assume the risk they get your premiums, I take whatever profit I made on the sale and I'm off to the next investment
b. Arbitrage the premium by going to another underwriter to insure those bonds (which you still own) at a risk premium of $1 million a year - X, X is profit to me, the risk is now on the books of whomever I bought the swap from they then can go out and get another underwriter to underwrite that risk and so on......

And you can do the same things.

Heck I don't even have to write a contract with you, anybody can go out and buy a swap on the bonds you own without you ever being involved and I can sell that swap to anybody that wants to buy it.

It's all a casino.

Should I be worried, MAYBE but unless non-transferrable is stipulated in the contract

Unless transferrable is stipulated, it's not. And it never was.

my options are to the contract (stop paying the premiums),

Your swap is suddenly in the money.

start handing over my premiums to Joe's Discount CDS Shack

When Goldman sold the contract, you kept paying Goldman?

the fact that Joe's Discount CDS Shack doesn't have the reserves to cover in the event of default puts them in legal jeopardy so I'd imagine Joe will be out looking for a buyer or underwriter .

All your covered mortgages defaulted, who is going to give Joe the money to cover them?
Sounds like you're screwed.

Merrill has zero risk in this scenario if the liability risk for the contract is moved off their books,

Signing an offsetting contract with a third party did not move the risk off your books, it just set up the opposite risk with someone else.

If Merrill has to pay off Goldman, but Morgan defaulted, why does Merrill have zero risk?

Aren't what?

The 2 party, you and Goldman, contract you signed is not transferrable.

Saleable?

If Goldman could sell it, that would be a transfer.

How many parties are involved in a mortgage contract?

We're talking about the CDS, not any mortgage.

That was the part of the problem, CDS Contracts were not "standarized" or regulated

Or transferrable or nettable.

they were private party contracts which means that they can be bought, sold or underwritten based on the terms of the specific contract language.

The terms of the contract never said they could be sold or transferred.

If you had $100 million in bonds that you wanted to insure and you come to me to buy a swap and based on my risk assessment I come up with a figure of $1 million a year in risk premium, we could write that contract, if we assume there is no non-transferability clause (which wouldn't be in either one of our interests)

You're wrong. If I did a trade with Goldman because I felt secure with their deep pockets, it is definitely not in my interest that they could transfer their risk to Joe's CDS Shack.

Do some research. This was a huge issue before the crash.
They talked about standardizing these contracts and making them exchange tradeable.
They never did.

*sigh* ya know you should really learn how to use BBCode for quoting, it's easier for you and easier for your reader.

Anywho, nice chatting with you ToddsterPatriot, you always seem to have an interesting take on things but to put this question to rest.

"Since swaps are highly customized and not easily standardized, the swap market is considered an over-the-counter market. That means swap contracts cannot typically be easily traded on an exchange (however there are swap indexes available on some public exchanges).


However, that does not mean that swaps are illiquid instruments, quite the contrary. The swap market is one of the largest and most liquid marketplaces in the world, with many willing participants in most cases ready to take either side of a contract to either hedge some sort of exposure or for speculation. It has been estimated that in 2009 the notional amount outstanding in over-the-counter interest rate swaps was nearing $350 trillion."

For your researching pleasure....
An In-Depth Look at The Swap Market
Credit Default Swap - CDS

Have a nice day

That means swap contracts cannot typically be easily traded on an exchange

Because they're 2 party contracts.

(however there are swap indexes available on some public exchanges).

Such an index wouldn't be similar to a CDS.

The swap market is one of the largest and most liquid marketplaces in the world,

Absolutely.

It has been estimated that in 2009 the notional amount outstanding in over-the-counter interest rate swaps was nearing $350 trillion."

With a lot of those being offsetting contracts that couldn't be netted.

Thanks. Glad to help.

 

[NightFox]

Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.

Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?

I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable, which leads one to conclude that you think that trades only occur on public exchanges.

Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.

Let's say you wanted to buy a CDS to protect your mortgage portfolio.
You get a quote from Goldman Sachs and a quote from Joe's Discount CDS Shack.
Joe will give you a better deal, but he only has $10,000 in capital and has only been in business since March.

You decide to go with Goldman.
6 months later, Goldman gets bearish on your portfolio, decides to trade your contract to Joe.
Should you be worried? A contract is a contract.

Should I be worried, MAYBE but unless non-transferrable is stipulated in the contract my options are to the contract (stop paying the premiums), start handing over my premiums to Joe's Discount CDS Shack or sell my end of the contract to somebody else that has more faith in Joe's than I do, in either case the fact that Joe's Discount CDS Shack doesn't have the reserves to cover in the event of default puts them in legal jeopardy so I'd imagine Joe will be out looking for a buyer or underwriter .

Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?

Who said it was? In my scenario, does Merrill have zero risk? Why?

Merrill has zero risk in this scenario if the liability risk for the contract is moved off their books, either by outright selling the contract or having the risk underwritten by somebody else.

I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable

Only because the 2 party contracts aren't.

Aren't what? Saleable? How many parties are involved in a mortgage contract?

If you want a CDS contract that is standardized, nettable and tradable, like a futures or options contract on an exchange, you'd have to find one on an exchange with a clearing corporation. AFAIK, there are none currently available.
It's only fairly recently that CDS contracts have been nettable between the 2 original parties.

That was the part of the problem, CDS Contracts were not "standarized" or regulated, they were private party contracts which means that they can be bought, sold or underwritten based on the terms of the specific contract language.

If you had $100 million in bonds that you wanted to insure and you come to me to buy a swap and based on my risk assessment I come up with a figure of $1 million a year in risk premium, we could write that contract, if we assume there is no non-transferability clause (which wouldn't be in either one of our interests) and I decide that I have more attractive places to put those reserves into play then I can:

a. sell the contract outright to somebody else for X dollars, they assume the risk they get your premiums, I take whatever profit I made on the sale and I'm off to the next investment
b. Arbitrage the premium by going to another underwriter to insure those bonds (which you still own) at a risk premium of $1 million a year - X, X is profit to me, the risk is now on the books of whomever I bought the swap from they then can go out and get another underwriter to underwrite that risk and so on......

And you can do the same things.

Heck I don't even have to write a contract with you, anybody can go out and buy a swap on the bonds you own without you ever being involved and I can sell that swap to anybody that wants to buy it.

It's all a casino.

Should I be worried, MAYBE but unless non-transferrable is stipulated in the contract

Unless transferrable is stipulated, it's not. And it never was.

my options are to the contract (stop paying the premiums),

Your swap is suddenly in the money.

start handing over my premiums to Joe's Discount CDS Shack

When Goldman sold the contract, you kept paying Goldman?

the fact that Joe's Discount CDS Shack doesn't have the reserves to cover in the event of default puts them in legal jeopardy so I'd imagine Joe will be out looking for a buyer or underwriter .

All your covered mortgages defaulted, who is going to give Joe the money to cover them?
Sounds like you're screwed.

Merrill has zero risk in this scenario if the liability risk for the contract is moved off their books,

Signing an offsetting contract with a third party did not move the risk off your books, it just set up the opposite risk with someone else.

If Merrill has to pay off Goldman, but Morgan defaulted, why does Merrill have zero risk?

Aren't what?

The 2 party, you and Goldman, contract you signed is not transferrable.

Saleable?

If Goldman could sell it, that would be a transfer.

How many parties are involved in a mortgage contract?

We're talking about the CDS, not any mortgage.

That was the part of the problem, CDS Contracts were not "standarized" or regulated

Or transferrable or nettable.

they were private party contracts which means that they can be bought, sold or underwritten based on the terms of the specific contract language.

The terms of the contract never said they could be sold or transferred.

If you had $100 million in bonds that you wanted to insure and you come to me to buy a swap and based on my risk assessment I come up with a figure of $1 million a year in risk premium, we could write that contract, if we assume there is no non-transferability clause (which wouldn't be in either one of our interests)

You're wrong. If I did a trade with Goldman because I felt secure with their deep pockets, it is definitely not in my interest that they could transfer their risk to Joe's CDS Shack.

Do some research. This was a huge issue before the crash.
They talked about standardizing these contracts and making them exchange tradeable.
They never did.

*sigh* ya know you should really learn how to use BBCode for quoting, it's easier for you and easier for your reader.

Anywho, nice chatting with you ToddsterPatriot, you always seem to have an interesting take on things but to put this question to rest.

"Since swaps are highly customized and not easily standardized, the swap market is considered an over-the-counter market. That means swap contracts cannot typically be easily traded on an exchange (however there are swap indexes available on some public exchanges).


However, that does not mean that swaps are illiquid instruments, quite the contrary. The swap market is one of the largest and most liquid marketplaces in the world, with many willing participants in most cases ready to take either side of a contract to either hedge some sort of exposure or for speculation. It has been estimated that in 2009 the notional amount outstanding in over-the-counter interest rate swaps was nearing $350 trillion."

For your researching pleasure....
An In-Depth Look at The Swap Market
Credit Default Swap - CDS

Have a nice day

That means swap contracts cannot typically be easily traded on an exchange

Because they're 2 party contracts.

(however there are swap indexes available on some public exchanges).

Such an index wouldn't be similar to a CDS.

The swap market is one of the largest and most liquid marketplaces in the world,

Absolutely.

It has been estimated that in 2009 the notional amount outstanding in over-the-counter interest rate swaps was nearing $350 trillion."

With a lot of those being offsetting contracts that couldn't be netted.

Thanks. Glad to help.

Uh-huh, thanks for the practical demonstration on how one goes about contradicting oneself, much appreciated.

... meanwhile back in the classroom we learned that, contrary to the opinions of some, CDS are indeed both tradeable and widely traded all over the globe.

 

[Toddsterpatriot]

Why not? it's a contract, just like a mortgage is a contract, the obligations and benefits on either go to the holder of the contract.

Let's say you wanted to buy a CDS to protect your mortgage portfolio.
You get a quote from Goldman Sachs and a quote from Joe's Discount CDS Shack.
Joe will give you a better deal, but he only has $10,000 in capital and has only been in business since March.

You decide to go with Goldman.
6 months later, Goldman gets bearish on your portfolio, decides to trade your contract to Joe.
Should you be worried? A contract is a contract.

Should I be worried, MAYBE but unless non-transferrable is stipulated in the contract my options are to the contract (stop paying the premiums), start handing over my premiums to Joe's Discount CDS Shack or sell my end of the contract to somebody else that has more faith in Joe's than I do, in either case the fact that Joe's Discount CDS Shack doesn't have the reserves to cover in the event of default puts them in legal jeopardy so I'd imagine Joe will be out looking for a buyer or underwriter .

Yeah and? what makes you think that risk is calculated by counting the number of contracts one has on one's books?

Who said it was? In my scenario, does Merrill have zero risk? Why?

Merrill has zero risk in this scenario if the liability risk for the contract is moved off their books, either by outright selling the contract or having the risk underwritten by somebody else.

I'm not but it appears that you are since you're the one that's claiming that CDS aren't tradeable

Only because the 2 party contracts aren't.

Aren't what? Saleable? How many parties are involved in a mortgage contract?

If you want a CDS contract that is standardized, nettable and tradable, like a futures or options contract on an exchange, you'd have to find one on an exchange with a clearing corporation. AFAIK, there are none currently available.
It's only fairly recently that CDS contracts have been nettable between the 2 original parties.

That was the part of the problem, CDS Contracts were not "standarized" or regulated, they were private party contracts which means that they can be bought, sold or underwritten based on the terms of the specific contract language.

If you had $100 million in bonds that you wanted to insure and you come to me to buy a swap and based on my risk assessment I come up with a figure of $1 million a year in risk premium, we could write that contract, if we assume there is no non-transferability clause (which wouldn't be in either one of our interests) and I decide that I have more attractive places to put those reserves into play then I can:

a. sell the contract outright to somebody else for X dollars, they assume the risk they get your premiums, I take whatever profit I made on the sale and I'm off to the next investment
b. Arbitrage the premium by going to another underwriter to insure those bonds (which you still own) at a risk premium of $1 million a year - X, X is profit to me, the risk is now on the books of whomever I bought the swap from they then can go out and get another underwriter to underwrite that risk and so on......

And you can do the same things.

Heck I don't even have to write a contract with you, anybody can go out and buy a swap on the bonds you own without you ever being involved and I can sell that swap to anybody that wants to buy it.

It's all a casino.

Should I be worried, MAYBE but unless non-transferrable is stipulated in the contract

Unless transferrable is stipulated, it's not. And it never was.

my options are to the contract (stop paying the premiums),

Your swap is suddenly in the money.

start handing over my premiums to Joe's Discount CDS Shack

When Goldman sold the contract, you kept paying Goldman?

the fact that Joe's Discount CDS Shack doesn't have the reserves to cover in the event of default puts them in legal jeopardy so I'd imagine Joe will be out looking for a buyer or underwriter .

All your covered mortgages defaulted, who is going to give Joe the money to cover them?
Sounds like you're screwed.

Merrill has zero risk in this scenario if the liability risk for the contract is moved off their books,

Signing an offsetting contract with a third party did not move the risk off your books, it just set up the opposite risk with someone else.

If Merrill has to pay off Goldman, but Morgan defaulted, why does Merrill have zero risk?

Aren't what?

The 2 party, you and Goldman, contract you signed is not transferrable.

Saleable?

If Goldman could sell it, that would be a transfer.

How many parties are involved in a mortgage contract?

We're talking about the CDS, not any mortgage.

That was the part of the problem, CDS Contracts were not "standarized" or regulated

Or transferrable or nettable.

they were private party contracts which means that they can be bought, sold or underwritten based on the terms of the specific contract language.

The terms of the contract never said they could be sold or transferred.

If you had $100 million in bonds that you wanted to insure and you come to me to buy a swap and based on my risk assessment I come up with a figure of $1 million a year in risk premium, we could write that contract, if we assume there is no non-transferability clause (which wouldn't be in either one of our interests)

You're wrong. If I did a trade with Goldman because I felt secure with their deep pockets, it is definitely not in my interest that they could transfer their risk to Joe's CDS Shack.

Do some research. This was a huge issue before the crash.
They talked about standardizing these contracts and making them exchange tradeable.
They never did.

*sigh* ya know you should really learn how to use BBCode for quoting, it's easier for you and easier for your reader.

Anywho, nice chatting with you ToddsterPatriot, you always seem to have an interesting take on things but to put this question to rest.

"Since swaps are highly customized and not easily standardized, the swap market is considered an over-the-counter market. That means swap contracts cannot typically be easily traded on an exchange (however there are swap indexes available on some public exchanges).


However, that does not mean that swaps are illiquid instruments, quite the contrary. The swap market is one of the largest and most liquid marketplaces in the world, with many willing participants in most cases ready to take either side of a contract to either hedge some sort of exposure or for speculation. It has been estimated that in 2009 the notional amount outstanding in over-the-counter interest rate swaps was nearing $350 trillion."

For your researching pleasure....
An In-Depth Look at The Swap Market
Credit Default Swap - CDS

Have a nice day

That means swap contracts cannot typically be easily traded on an exchange

Because they're 2 party contracts.

(however there are swap indexes available on some public exchanges).

Such an index wouldn't be similar to a CDS.

The swap market is one of the largest and most liquid marketplaces in the world,

Absolutely.

It has been estimated that in 2009 the notional amount outstanding in over-the-counter interest rate swaps was nearing $350 trillion."

With a lot of those being offsetting contracts that couldn't be netted.

Thanks. Glad to help.

Uh-huh, thanks for the practical demonstration on how one goes about contradicting oneself, much appreciated.

... meanwhile back in the classroom we learned that, contrary to the opinions of some, CDS are indeed both tradeable and widely traded all over the globe.

Tell me more about this contradiction.

Yes, CDS are widely tradeable.
Not on exchanges, not nettable and not transferable.