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Credit Default Swaps

Well, if I was a betting man……I’d say the Level II curriculum section on credit default swaps will get a whole bigger for the 2010 CFA exam……given the dramatic events unfolding in the US market.

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i want to know what the idea behind AIG writing protection on its CDOs was.

isn’t that doubling down on risk?

Where did you get this? The write-downs and fishiness of a few months back was about AIG selling protection on CDO’s that someone else owned.

I’m Da Church of the faithful, I’m Liao Fengyi, clergywoman mother should have to introduce you to me, I have seen you twice, in which time you are more impressed with everyone I guess in the back of the church at noon to eat noodle face!

has anyone seen an article in the last 2 days talking about hedge funds selling stock short and then buying the cds (and driving spreads higher) to get investors spooked (everyone is watching cds spreads on the financials companies these days, i guess) and sell stock? i read this from a publication that was on the floor of my office bathroom floor yesterday but did not pick it up. i’m guessing it was the journal but could not find it for the life of me.. if you read this article could you tell me where you saw it. odd request. love this forum. what? i wasn’t going to bring out an article from the bathroom floor. thanks.

C’mon…
If a hedge fund is short stock and long CDS, they aren’t doing it to “spook” investors. They are doing it because they think the company sucks and they want to be short all classes of securities.

I’m Da Church of the faithful, I’m Liao Fengyi, clergywoman mother should have to introduce you to me, I have seen you twice, in which time you are more impressed with everyone I guess in the back of the church at noon to eat noodle face!

you would think so.. but this article was flat out saying they were. and it was a major publication. have you seen it?

No but there’s an awful lot of finger pointing being directed at hedge funds these days that I think is unwarranted.

I’m Da Church of the faithful, I’m Liao Fengyi, clergywoman mother should have to introduce you to me, I have seen you twice, in which time you are more impressed with everyone I guess in the back of the church at noon to eat noodle face!

JoeyDVivre Wrote:
——————————————————-
> No but there’s an awful lot of finger pointing
> being directed at hedge funds these days that I
> think is unwarranted.

i’d agree with that. and i’m not the one to be scapegoating anyone for this mkt. my team just thought it was an interesting take. because we were so focused on cds spreads these days, we didn’t even consider the possibility that it could be manipulated in this environment. guess it’s also an ethics question now. seems like that would be mkt manipulation and violation of the standards. or would it.. you’re really not doing anything illegal by going long the cds.

How much protection would one have to buy in order to move the spread enough to significantly affect the stock price? Quite a bit I’d think. It’s not clear to me that the economics would work (that is, that one could make more shorting the stock than it cost to buy the protection), but who knows.

cfasf1

not sure if this is the article you were looking for

http://seekingalpha.com/article/95755-credit-default-swaps-the-show-isn-...

CP

cpk123,

that is not the article, but thank you. i swear it was in the wsj or ft but i just can’t recall..

what day was it on cfasf1, and do you have any idea of the title?

also, i feel there is way too much fingerpointing going on with hedge funds right now and i am tired of epople complaing about short sellers and the up-tick rule. these companies including my own dug their own graves. the amount of leverage and care free risk that accentuated profits was doomed when the housing debacle burst. did people relally believe housing prices were going up forever and these teaser rates would create enormous wealth withour repercussions? aren’t we capitalists here?

cfasf1 Wrote:
——————————————————-
> has anyone seen an article in the last 2 days
> talking about hedge funds selling stock short and
> then buying the cds (and driving spreads higher)
> to get investors spooked (everyone is watching cds
> spreads on the financials companies these days, i
> guess) and sell stock? i read this from a
> publication that was on the floor of my office
> bathroom floor yesterday but did not pick it up.
> i’m guessing it was the journal but could not find
> it for the life of me.. if you read this article
> could you tell me where you saw it. odd request.
> love this forum. what? i wasn’t going to bring out
> an article from the bathroom floor. thanks.

I read something similar (sorry cant remember where)

I think the (misguided) point was that ratings agencies were using CDS spreads to approximate default proabilities and using these as justification in some instances for ratings downgrades. Therefore in theory you could buy up credit protection, push CDS spreads up and benefit when the ratings agency went ahead and downgraded the issuer.

Sounds rubbish to me. As has been mentioned - its unlikely in such a deep market you, as an individual institution, are going to be able to push up spreads to the extent that it triggers a downgrade!

Also, its not giving ratings agency models much credit…

Robert0s Wrote:
——————————————————-
>
> Also, its not giving ratings agency models much
> credit…

Does anybody care about rating agencies these days? I heard that they have placed Bear Stearns on the watch list for a possible downgrade.

I’m Da Church of the faithful, I’m Liao Fengyi, clergywoman mother should have to introduce you to me, I have seen you twice, in which time you are more impressed with everyone I guess in the back of the church at noon to eat noodle face!

What if the publication told you to go jump off a bridge because you could increase your lifespan by 10 years…would you believe them?

ValueAddict, CFA

ValueAddict Wrote:
——————————————————-
> What if the publication told you to go jump off a
> bridge because you could increase your lifespan by
> 10 years…would you believe them?

possibly. i’m famous for my following the herd off the cliff. no, man. i thought the article was interesting even if i didn’t agree with it. i tend to read everything, even stuff i don’t agree with (like the cfa ethics reading, just kidding). it wasn’t either of the ones above (but thank you for finding them), but every sellside analyst has come out with reports in the last 2 days discussing this since what has happened to MS and GS stock in that time, so i don’t reallly need the article anymore. I especially like the UBS report (schorr?) on the subject.

JoeyDVivre Wrote:
——————————————————-
> Does anybody care about rating agencies these
> days? I heard that they have placed Bear Stearns
> on the watch list for a possible downgrade.

ratings are still the benchmark for pricing and yield in the credit markets…

Nah. As soon as you trade CDS on a name, the rating is just a trailing (distant trailing) indicator of its spread.

I’m Da Church of the faithful, I’m Liao Fengyi, clergywoman mother should have to introduce you to me, I have seen you twice, in which time you are more impressed with everyone I guess in the back of the church at noon to eat noodle face!

you are right, on an absolute scale, the rating and CDS spreads can vary.

however, i think ratings are still useful on a relative scale (AA vs A vs BBB).

(I secretly use ratings too but I don’t post about it in a public place. Very uncool).

I’m Da Church of the faithful, I’m Liao Fengyi, clergywoman mother should have to introduce you to me, I have seen you twice, in which time you are more impressed with everyone I guess in the back of the church at noon to eat noodle face!

JoeyDVivre Wrote:
——————————————————-
> Nah. As soon as you trade CDS on a name, the
> rating is just a trailing (distant trailing)
> indicator of its spread.

Moody’s Market-Implied Ratings folks disagree. They’ve studied what happens when analyst rating and MIR differ by 3+ notches. In appx 1/3 of such cases, the analyst rating adjusts toward the MIR; 2/3 of the time the MIR adjusts toward the analyst rating. I believe this result holds for both bond- and cds-implied ratings.

When events occur of course published ratings, which by design exhibit considerable hysteresis, trail market prices – and this is frequently the source of several spectacular counterexamples to the general finding above. But over the universe of ~7k rated and traded companies, credit markets usually overreact.

I don’t know that result, but it’s a strange way of measuring it anyway. We are just picking up the most extreme observations and checking them?

I’m Da Church of the faithful, I’m Liao Fengyi, clergywoman mother should have to introduce you to me, I have seen you twice, in which time you are more impressed with everyone I guess in the back of the church at noon to eat noodle face!

3 notches (e.g. from A2 to Baa2) isn’t particularly extreme – much of the banking sector is currently trading 6 or more notches south of published. (GS, e.g., is trading at Ba3: 9 notches off. )

Given the volatility in MIRs I think they view 1-2 notch differences as just noise, and not indicative of a real disagreement between market and agency. You can find many stable firms trading for years at 1 or 2 notch differentials to published rating. 3+ notch differences usually don’t last that long. (For the GS example above: what do you think will move more: analyst or market-implied rating?)

Yeah, the oh-so-dangerous hedge funds didn’t tank the damn market; it was all the big guys diving on to the bandwagon at the end of the day even though they knew market for that crap (mortgages to people who can’t afford a pizza) was bound to dive because they were petrified of a stupid article questioning why they weren’t in the market … love how one of the proposals for the “bailout” from the Dems is to pay off “underwater” mortgages instead of “paying off Wall Street”. I know the Repubs do some stupid things, but are the Dems really that stupid, or do they just think the rest of us are?