Bond Insurers

[Allan from Fallbrook]

Daniel: That’s correct, but with a caveat. It presupposes that in case of a correction, the various positions will not unwind in a disorderly fashion. This would be akin to what happened with LTCM in ’98. These various hedged positions are built using computer models that have not been tested in a full-blown crisis.

Moreover, many of the supposed “controls” (like insurance) are at grave risk due to both a lack of understanding and a lack of transparency.

Bernanke himself had to undergo a refresher course recently in this area. This is a very arcane area of finance, and many of the hedge fund players have been very lucky up to this point. The markets are under increasingly severe strain and, due to a lack of real-world testing for these computer models, there is a great deal of concern over what might happen.

I don’t think it is any surprise that Buffett has jumped into the monoline insurance/reinsurance market. There is a great amount of fear out there, which means there is a great deal of money to be made.

[bubba99]

The idea that the contracts are balanced relies on each party being able to perform. If somewhere in the line of balances defaults, I don’t get paid, and then cannot pay out the whole chain unravels and no one gets paid. And this assumes that I ever had the ability to pay. One end of the CDS is mortgage or bond assets that may be worthless. The other is Joe CDS seller and his 2 or 3 hundred basis point premium to provide the swap. This is hardly going to cover a hundred million dollar loss.

Credit Default Swaps (CDS’s) are functionally like insurance, but with no retained asset requirements like a real insurance company. Some articles I have read put the amount of 43 trillion on garbage backed paper – you know CMO’s or marginal corporate bonds. This is the dirty little secret that will cause the FED to do everything it can to head off a financial “event”. The implications of a wide spread failure are staggering.

[bubba99]

The idea that the contracts are balanced relies on each party being able to perform. If somewhere in the line of balances defaults, I don’t get paid, and then cannot pay out the whole chain unravels and no one gets paid. And this assumes that I ever had the ability to pay. One end of the CDS is mortgage or bond assets that may be worthless. The other is Joe CDS seller and his 2 or 3 hundred basis point premium to provide the swap. This is hardly going to cover a hundred million dollar loss.

Credit Default Swaps (CDS’s) are functionally like insurance, but with no retained asset requirements like a real insurance company. Some articles I have read put the amount of 43 trillion on garbage backed paper – you know CMO’s or marginal corporate bonds. This is the dirty little secret that will cause the FED to do everything it can to head off a financial “event”. The implications of a wide spread failure are staggering.

[bubba99]

The idea that the contracts are balanced relies on each party being able to perform. If somewhere in the line of balances defaults, I don’t get paid, and then cannot pay out the whole chain unravels and no one gets paid. And this assumes that I ever had the ability to pay. One end of the CDS is mortgage or bond assets that may be worthless. The other is Joe CDS seller and his 2 or 3 hundred basis point premium to provide the swap. This is hardly going to cover a hundred million dollar loss.

Credit Default Swaps (CDS’s) are functionally like insurance, but with no retained asset requirements like a real insurance company. Some articles I have read put the amount of 43 trillion on garbage backed paper – you know CMO’s or marginal corporate bonds. This is the dirty little secret that will cause the FED to do everything it can to head off a financial “event”. The implications of a wide spread failure are staggering.

[bubba99]

The idea that the contracts are balanced relies on each party being able to perform. If somewhere in the line of balances defaults, I don’t get paid, and then cannot pay out the whole chain unravels and no one gets paid. And this assumes that I ever had the ability to pay. One end of the CDS is mortgage or bond assets that may be worthless. The other is Joe CDS seller and his 2 or 3 hundred basis point premium to provide the swap. This is hardly going to cover a hundred million dollar loss.

Credit Default Swaps (CDS’s) are functionally like insurance, but with no retained asset requirements like a real insurance company. Some articles I have read put the amount of 43 trillion on garbage backed paper – you know CMO’s or marginal corporate bonds. This is the dirty little secret that will cause the FED to do everything it can to head off a financial “event”. The implications of a wide spread failure are staggering.

[bubba99]

The idea that the contracts are balanced relies on each party being able to perform. If somewhere in the line of balances defaults, I don’t get paid, and then cannot pay out the whole chain unravels and no one gets paid. And this assumes that I ever had the ability to pay. One end of the CDS is mortgage or bond assets that may be worthless. The other is Joe CDS seller and his 2 or 3 hundred basis point premium to provide the swap. This is hardly going to cover a hundred million dollar loss.

Credit Default Swaps (CDS’s) are functionally like insurance, but with no retained asset requirements like a real insurance company. Some articles I have read put the amount of 43 trillion on garbage backed paper – you know CMO’s or marginal corporate bonds. This is the dirty little secret that will cause the FED to do everything it can to head off a financial “event”. The implications of a wide spread failure are staggering.

[SD Realtor]

Allan and Daniel good responses. The 600 trillion was a number that I heard on Friday but again, I am a pup when it comes to derivatives. The point is that derivatives are all encompassing and have to do with pretty much…. well pretty much everything. Also I am far from the sky is falling type of poster and like to learn about things before I run and hide from them. To me, ACA, MBIA and Ambac falling apart is small potatoes but noteworthy. I was reading that Buffet will stick to insuring munis and safe stuff and will steer clear of the dung.

Anyways like I said I was surprised nobody posted this stuff because to me it is pretty interesting. Also MBIA and Ambac need to come up with a billion by the end of January or they get downgraded.

[SD Realtor]

Allan and Daniel good responses. The 600 trillion was a number that I heard on Friday but again, I am a pup when it comes to derivatives. The point is that derivatives are all encompassing and have to do with pretty much…. well pretty much everything. Also I am far from the sky is falling type of poster and like to learn about things before I run and hide from them. To me, ACA, MBIA and Ambac falling apart is small potatoes but noteworthy. I was reading that Buffet will stick to insuring munis and safe stuff and will steer clear of the dung.

Anyways like I said I was surprised nobody posted this stuff because to me it is pretty interesting. Also MBIA and Ambac need to come up with a billion by the end of January or they get downgraded.

[SD Realtor]

Allan and Daniel good responses. The 600 trillion was a number that I heard on Friday but again, I am a pup when it comes to derivatives. The point is that derivatives are all encompassing and have to do with pretty much…. well pretty much everything. Also I am far from the sky is falling type of poster and like to learn about things before I run and hide from them. To me, ACA, MBIA and Ambac falling apart is small potatoes but noteworthy. I was reading that Buffet will stick to insuring munis and safe stuff and will steer clear of the dung.

Anyways like I said I was surprised nobody posted this stuff because to me it is pretty interesting. Also MBIA and Ambac need to come up with a billion by the end of January or they get downgraded.

[SD Realtor]

Allan and Daniel good responses. The 600 trillion was a number that I heard on Friday but again, I am a pup when it comes to derivatives. The point is that derivatives are all encompassing and have to do with pretty much…. well pretty much everything. Also I am far from the sky is falling type of poster and like to learn about things before I run and hide from them. To me, ACA, MBIA and Ambac falling apart is small potatoes but noteworthy. I was reading that Buffet will stick to insuring munis and safe stuff and will steer clear of the dung.

Anyways like I said I was surprised nobody posted this stuff because to me it is pretty interesting. Also MBIA and Ambac need to come up with a billion by the end of January or they get downgraded.

[SD Realtor]

Allan and Daniel good responses. The 600 trillion was a number that I heard on Friday but again, I am a pup when it comes to derivatives. The point is that derivatives are all encompassing and have to do with pretty much…. well pretty much everything. Also I am far from the sky is falling type of poster and like to learn about things before I run and hide from them. To me, ACA, MBIA and Ambac falling apart is small potatoes but noteworthy. I was reading that Buffet will stick to insuring munis and safe stuff and will steer clear of the dung.

Anyways like I said I was surprised nobody posted this stuff because to me it is pretty interesting. Also MBIA and Ambac need to come up with a billion by the end of January or they get downgraded.

[Allan from Fallbrook]

SDR: Bubba99 makes the point I was getting at relative to the FED doing everything in it’s power to head this event off.

Daniel’s presumption of equally balanced positions is erroneous in that quite a few of these hedge funds, and equity funds and investment banks have little to no understanding of how the derivatives will function in the event of a full-blown crisis (in point of fact, no one knows because it hasn’t happened). So, it will be a very interesting six months to year coming up. The FED and the ECB are pushing considerable liquidity into the market, and the response to date has been muted.

If you are interested in a pair of good books on the subject, read “A Demon of Our Design” and “Traders, Guns and Money”. The first is on hedge funds, and the second is on derivatives. Both are well-written and equally alarming in their own way.

I agree with you regarding not being a Chicken Little, but there is significant concern out there, and for very good reason. I penned a recollection of mine on another thread about being approached in 1994 to purchase derivative products. I was CFO of an insurance brokerage in Orange County, and these were all the rage after the OC Comptroller (Citron) had bought in. I was absolutely baffled during the presentation, as was my boss (the CEO). He was a former Bear Stearns guy, and an MBA from Ohio State, and equally confused. Very arcane stuff, and if the Chairman of the FED requires a remedial course…

[Allan from Fallbrook]

SDR: Bubba99 makes the point I was getting at relative to the FED doing everything in it’s power to head this event off.

Daniel’s presumption of equally balanced positions is erroneous in that quite a few of these hedge funds, and equity funds and investment banks have little to no understanding of how the derivatives will function in the event of a full-blown crisis (in point of fact, no one knows because it hasn’t happened). So, it will be a very interesting six months to year coming up. The FED and the ECB are pushing considerable liquidity into the market, and the response to date has been muted.

If you are interested in a pair of good books on the subject, read “A Demon of Our Design” and “Traders, Guns and Money”. The first is on hedge funds, and the second is on derivatives. Both are well-written and equally alarming in their own way.

I agree with you regarding not being a Chicken Little, but there is significant concern out there, and for very good reason. I penned a recollection of mine on another thread about being approached in 1994 to purchase derivative products. I was CFO of an insurance brokerage in Orange County, and these were all the rage after the OC Comptroller (Citron) had bought in. I was absolutely baffled during the presentation, as was my boss (the CEO). He was a former Bear Stearns guy, and an MBA from Ohio State, and equally confused. Very arcane stuff, and if the Chairman of the FED requires a remedial course…

[Allan from Fallbrook]

SDR: Bubba99 makes the point I was getting at relative to the FED doing everything in it’s power to head this event off.

Daniel’s presumption of equally balanced positions is erroneous in that quite a few of these hedge funds, and equity funds and investment banks have little to no understanding of how the derivatives will function in the event of a full-blown crisis (in point of fact, no one knows because it hasn’t happened). So, it will be a very interesting six months to year coming up. The FED and the ECB are pushing considerable liquidity into the market, and the response to date has been muted.

If you are interested in a pair of good books on the subject, read “A Demon of Our Design” and “Traders, Guns and Money”. The first is on hedge funds, and the second is on derivatives. Both are well-written and equally alarming in their own way.

I agree with you regarding not being a Chicken Little, but there is significant concern out there, and for very good reason. I penned a recollection of mine on another thread about being approached in 1994 to purchase derivative products. I was CFO of an insurance brokerage in Orange County, and these were all the rage after the OC Comptroller (Citron) had bought in. I was absolutely baffled during the presentation, as was my boss (the CEO). He was a former Bear Stearns guy, and an MBA from Ohio State, and equally confused. Very arcane stuff, and if the Chairman of the FED requires a remedial course…

[Allan from Fallbrook]

SDR: Bubba99 makes the point I was getting at relative to the FED doing everything in it’s power to head this event off.

Daniel’s presumption of equally balanced positions is erroneous in that quite a few of these hedge funds, and equity funds and investment banks have little to no understanding of how the derivatives will function in the event of a full-blown crisis (in point of fact, no one knows because it hasn’t happened). So, it will be a very interesting six months to year coming up. The FED and the ECB are pushing considerable liquidity into the market, and the response to date has been muted.

If you are interested in a pair of good books on the subject, read “A Demon of Our Design” and “Traders, Guns and Money”. The first is on hedge funds, and the second is on derivatives. Both are well-written and equally alarming in their own way.

I agree with you regarding not being a Chicken Little, but there is significant concern out there, and for very good reason. I penned a recollection of mine on another thread about being approached in 1994 to purchase derivative products. I was CFO of an insurance brokerage in Orange County, and these were all the rage after the OC Comptroller (Citron) had bought in. I was absolutely baffled during the presentation, as was my boss (the CEO). He was a former Bear Stearns guy, and an MBA from Ohio State, and equally confused. Very arcane stuff, and if the Chairman of the FED requires a remedial course…

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