I don’t work for AIG, however, I was just giving some thoughts. People have credit score (calculated by credit bureau), nowdays, many insurance company also want to know your credit score before they underwrite your insurance policy (auto, home, life). What if they can come up with CDS rate(score) for individual??!! That way, when bank issue mortgage/loan to individuals, they can have a way to hedge themselve. Stupid idea, what do you all think??
Two questions: 1) How would that be any different from a FICO score and 2) Why do you have such an aversion to pluralizing words?
stupid, no. Practical, no. Its easier to hedge a portfolio of 25-100 credit securities than it is to hedge a portfolio of a million+ of insurance policies. The costs would be way too high. I’m not in the insurance biz, but isn’t that pretty close to reinsurance? Insurance for insurance…
ws-- This is not a dumb idea, but lenders already do this. They package a bunch of loans together into an MBS and then buy a CDS against it. The value of the CDS and MBS is heavily weighted on FICO scores of underlying borrowers and the LTV of the underlying assets.
um how is that different from a credit score ?
I guess it won’t be too much different from the FICO score…get a model to translate a 720 FICO score into 20bps on $100K is the trick. I know banks already do that with purchasing CDS on MBS. However, that is the root of the mess—packaging. True identity of the borrower is lost. That is why I think (it will be costly) by hedging invidivually, the hedge can be more precise.
ws Wrote: ------------------------------------------------------- > I guess it won’t be too much different from the > FICO score…get a model to translate a 720 FICO > score into 20bps on $100K is the trick. I know > banks already do that with purchasing CDS on MBS. > However, that is the root of the mess—packaging. > True identity of the borrower is lost. That is > why I think (it will be costly) by hedging > invidivually, the hedge can be more precise. The liquidity of the MBS and CDS market is already extremely weak–which caused all the bank failures. Disaggregating it further probably wouldn’t help things.
This idea is truly brilliant. I think you should start a hedge fund right now using this superior information.
^Heck, I will start if you can find me some seed money!!
Serviced By Others Wrote: ------------------------------------------------------- > ws Wrote: > -------------------------------------------------- > ----- > > I guess it won’t be too much different from the > > FICO score…get a model to translate a 720 > FICO > > score into 20bps on $100K is the trick. I know > > banks already do that with purchasing CDS on > MBS. > > However, that is the root of the > mess—packaging. > > True identity of the borrower is lost. That > is > > why I think (it will be costly) by hedging > > invidivually, the hedge can be more precise. > > > The liquidity of the MBS and CDS market is already > extremely weak–which caused all the bank > failures. Disaggregating it further probably > wouldn’t help things. Not sure where you got that CDS liquidity is extremely weak and that is what called bank failures? Damn you sound like Barney Frank.
No, your idea is not stupid. It is beyond stupid.
Pixel Wrote: ------------------------------------------------------- > No, your idea is not stupid. > > It is beyond stupid. i’m starting to like you again Pixel.
Pixel Wrote: ------------------------------------------------------- > No, your idea is not stupid. > > It is beyond stupid. Care to explaine your reason?
ws Wrote: ------------------------------------------------------- > I don’t work for AIG, however, I was just giving > some thoughts. > > People have credit score (calculated by credit > bureau), nowdays, many insurance company also want > to know your credit score before they underwrite > your insurance policy (auto, home, life). > > What if they can come up with CDS rate(score) for > individual!!! That way, when bank issue > mortgage/loan to individuals, they can have a way > to hedge themselve. > > Stupid idea, what do you all think?? I’m sure the secondary market for CDS on Mary Thompson in Des Moines, ID will be real liquid.
^Good point, a fixed 30-yr mortgage has a average life of 7-8 yrs before it is refianced. That could be a good time to sell Mary Thompson’s CDS to the next mortgage holder.
How much do you pay a market maker that is trading CDS contracts on $5,000 credit card balances?