If the world’s favorite uniquely recalcitrant debtor can delay deciding whether or not to default, maybe swaps betting on that default should get to stick around, too. Read more »

You lost it because banks are monopolistic monsters. Just ask an affiliate of a corpse and a German state bank. Read more »

The thing about antitrust law is that it’s so understandable. Not in the sense that a human can easily understand antitrust law, particularly, just that it’s easy to understand where the people who violate it are coming from.1 This EU antitrust case against 13 banks for “colluding to prevent the lucrative global business of trading credit derivatives from moving onto regulated exchanges and away from markets controlled by the banks themselves,” for instance. Like, here you are in 2006 or whatever, and you’re a big bank, and you’ve built yourself a nice little business buying and selling credit default swaps. This generates information and that information is useful; it’s even more useful if you share it with your other CDS-trading friends. So you and your big-bank friends and your ISDA and your Markit get together to share trade data, just like those guys did under that buttonwood tree that one time. Once you’ve got trade data, for instance, you can make an index, and so you can trade index CDS, which means you can move from having a weird niche product to a macro credit product, and it is good. Also you can gouge customers because, y’know, it’s OTC and stuff.

Anyway one day an exchange comes to you and says “we’d like to take all your data and use it to massively undercut you on price and drive you out of this lucrative little business you got here, whaddaya say?” And so obviously you say no. Read more »

Would you have predicted this?

This paper investigates the impact of credit rating changes on the sovereign spreads in the European Union and investigates the macro and financial factors that account for the time varying effects of a given credit rating change. We find that changes of ratings are informative, economically important and highly statistically significant in panel models even after controlling for a host of domestic and global fundamental factors and investigating various functional forms, time and country groupings and dynamic structures. Dynamic panel model estimates indicate that a credit rating upgrade decreases CDS spreads by about 45 basis points, on average, for EU countries.

I would not have! Perhaps I am biased from living in a country where credit ratings are a contrary indicator of sovereign interest rates, and where municipal defaults inevitably lead to helpful comments from ratings agencies like “If the payment doesn’t get made, we would downgrade the rating.” Apparently, though, sovereign ratings matter, at least in Europe and at least at some points on the ratings scale.1 Read more »

  • 11 Mar 2013 at 4:15 PM

CDS Market Almost Ready For Another Greek Default

Last week ISDA, who are in charge of credit default swaps, circulated some proposed changes to CDS to account for all the Greek, Argentine, SNS, everything unpleasantness. This prompted me to try out my one journalistic technique – calling1 ISDA and asking them to send me a copy – but they declined, so we’ll just rely on this research note from JPMorgan’s Saul Doctor and Danny White. Here’s the gist:2

ISDA will publish a list of “Package Observable Bonds” (POBs) based on size, liquidity, maturity and governing law. The proposals suggest that there could be one domestic and one international law bond in each of the following silos – a) 1-3 years, b) 3-12 years, c) 12-30 years – based on a set of rules that determine the largest and most frequently traded bond in each silo. An initial POB will remain as such unless, prior to the Credit Event, it no longer meets the deliverability criteria, is called/matures, or is reduced below a threshold. New bonds would be added when a particular bucket is empty.

If a Credit Event occurs (Restructuring or other Credit Event) and a POB has been restructured into a package, then that package, in its entirety, will be deliverable into the auction. For example if a POB with a notional of $100m is written down by 50% and the remaining portion converted into 50 shares, then the 50 shares could be delivered against $100m of CDS. If there is more than one package on offer, then the one that has the highest subscribers will be chosen. All obligations meeting the deliverability criteria remain deliverable as long as they were issued prior to the Credit Event.

So lots of people have been calling for this for a long time – me least of all, but also real people like the Managed Funds Association and Darrell Duffie. But you get a sense from that summary of how it’s more complicated than dopes like me think. Read more »

Yesterday the Second Circuit held arguments in the Argentina sovereign debt case. This case is … I mean, you kind of had to be following along, but quick summary: back in the day Argentina defaulted on some old bonds, and exchanged most of them at a discount into new bonds, which it’s been making payments on. Elliott Management bought a bunch of old bonds, which Argentina has not been making payments on, and sued Argentina to make them pay the old bonds pari passu with the new ones. Elliott won in a lower court, and then sort of won on appeal, and then Argentina raised some mind-melting consequences in the lower court, and then Elliott won again anyway, and now it’s back up on appeal again, and the oral arguments were yesterday. Also there’s a boat.

It sounds like yesterday’s hearing was sort of a nightmare for Argentina, though the nice thing for Argentina is that, as a sovereign nation, they have the option of waking up:

“We are representing a government, and governments will not be told to do things that fundamentally violate their principles,” Jonathan Blackman, a lawyer for the deadbeat South American country, told a Manhattan US appeals court.

“So the answer is you will not obey any order but the one you propose?” Judge Reena Raggi asked.

“We would not voluntarily obey such an order,” replied Blackman — who later said Argentina would be no more likely to obey a US court than the US would be to obey an Iranian court.

If you get to choose whether or not to obey it, it’s not so much of an order. Read more »

  • 11 Feb 2013 at 3:01 PM

CDS Contracts Not Ready For The Ways We Go Bankrupt Now

CDS, what is wrong with you? Here is how CDS should work:

  • There are bonds.
  • You buy CDS that is supposed to pay off if something goes wrong with the bonds.
  • Something goes wrong with the bonds, insofar as they default.
  • Like so:

  • So you scoop up a Defaulted Bond, hand it to the CDS seller, and he hands you back the face amount of the bond.
  • He’s stuck with the Defaulted Bond, and effectively loses the difference between the face amount of the bond and the value of the Defaulted Bond.

In the modern world here is what often happens:

  • There are bonds.
  • You buy CDS that is supposed to pay off if something goes wrong with the bonds.
  • Something goes wrong with the bonds, insofar as they poof into some weird garbage-y thing or assortment of garbage-y things.
  • Like so:

Read more »

  • 18 Jan 2013 at 6:14 PM

Bernie Madoff Was A Toni Braxton Fan

Unfortunately the Ponzi schemer and TB had to part ways when the government seized his assets but now you have a chance to enjoy all the ballads that would get him through late nights at the office, plus his favorite numbers from Chicago, the best of Barbara Streisand, and every other item in Berns’ prized CD collection, available today for the extremely reasonable price of $100. Act now! [eBay via Complex]