• 26 Nov 2012 at 3:28 PM

Argentina Can Make Its Problems The Snake’s Problems

Oh Argentina. Still a mess! Basically all the bad things happened on Wednesday: Judge Griesa ruled that (1) Argentina really can’t pay holders of its exchange bonds without also paying off Elliott Associates on its old, unhaircut, defaulted bonds, and (2) neither can anyone else, including such luminaries as Bank of New York (the indenture trustee) and DTC (the clearing system for the bonds). These things are good for Elliott Associates and bad for various other people; you can read about some of the badness here or here or elsewhere.

Here is a note from JPMorgan’s Vladimir Werning on what might happen next; my favorite outcome is this:

- Argentina deposits GDP [i.e., GDP warrants, the first thing that gets paid, but the same logic applies to actual bonds - ed.] by sending check to Cede,
- Argentina does not deposit money for holdouts in escrow
- Cede has property of funds on behalf of bond holders
- Cede does not transfer to DTC but its possession means Argentina has extinguished its obligation de Jure
- The funds for GDP sits idle in Cede – they cannot be attached by Court, but cannot be taken out by bond holders
- Holdouts claim Argentina has re-routed the payments and is not complying with injunction
- Argentina’s lawyers claim payment to Cede is contemplated in the indenture and does not constitute re-routing
In Cede option there is no dispute, obligations have been extinguished de jure, no default, technical or otherwise.

Cede, of course, being the DTC nominee that is the registered holders of all of Argentina’s bonds;1 Werning points out that, while the normal method of paying bondholders is by sending a check to BoNY to send to Cede, sending a check straight to Cede also fits the requirements of the indenture. And because Cede is the only holder of the bonds, if Argentina pays it, then it’s paid the bonds, and there’s no default, technical or otherwise, no triggering of CDS, and nothing bad has happened. Argentina-wise and bond-wise. Actual bond investors might disagree. Read more »

I’m a little obsessed with the Depository Trust & Clearing Corp. One way to think of the financial industry is that it is basically a machine for abstracting real human activity: you buy a house made of bricks and wood and stuff, but the financial industry enters numbers in a computer to represent your mortgage, bundles it with other mortgages, slices up the risks of those mortgages – house price appreciation, credit risk, interest rate risk, prepayment risk – and sells them to different people who never need to care about what your house looks like. There you sit in your house, while the numbers spin unseen around you.

The machine, though, is built out of pretty old-timey materials. Those mortgages are mortgages, recorded on pieces of paper in county records offices somewhere; the securities are securities, scraps of paper that convey rights to whoever happens to hold them. Bonds used to be, and in some metaphorical and legalistic sense still often are, pieces of paper with coupons attached that you tear off and mail to the corporation to get them to send you a check for your interest payment. I think things like that actually happened, in the dark ages. But not for a long time.

At the core of the financial abstraction machine is the engine that turns old-timey scraps of paper and whatnot into abstractions.1 And that engine is an actual thing! It is called DTCC! It’s, like, a building downtown, and all the paper certificates come in, and out come numbers on screens that you can sum and multiply and manipulate and sell derivatives of to your friends. It’s what allows finance to be fast and computerized and high-frequency, so you can buy derivatives and indexes and deltas and exposures rather than, like, ten pieces of paper that give you ownership in Ye Olde Buggy Whips Concern.

Anyway this happened: Read more »

  • 08 Aug 2011 at 11:52 AM

Nothing Will Ever Be AAA Again

We assume that you, like everyone else, have been madly dumping Treasuries now that S&P has downgraded them. Smart! And presumably in your flight to safety you’ve been buying AAA rated corporate bonds, from let’s say XOM or MSFT. Which are obviously safer than Treasuries because, while sure the U.S. Treasury can print dollars and Microsoft and Exxon can’t, Microsoft can always send out a secret electronic signal that makes your Windows crash 100% of the time instead of the steady-state 20%, which will force you to upgrade to the next version, which is pretty much the next best thing to printing money. And if XOM is short on cash it can just start a war in the Middle East (that’s how it works right?).

So you think you’re in pretty good shape right? Not so fast – your shit is still really AA+.

The problem is that S&P this morning downgraded Depository Trust Company to AA+ in sympathy with the sovereign downgrade:
Read more »