WASHINGTON Senators hoping to pass a sweeping overhaul of financial regulations this week are frantically trying to resolve tough - and controversial - provisions limiting, regulating and shedding light on the largely hidden world of complex investments known as derivatives.
Feb. 25 (Bloomberg) — The biggest credit-default swaps investors oppose targets for clearing trades as regulators attempt to curb risk in the $25 trillion market.
Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place.
When one of the world’s most renowned hedge fund investors turns 180 degrees on a key financial instrument that has been centre stage throughout the financial crisis, it is worth paying heed.
For the past year, as politicians have grappled to get their heads around the perils of complex finance, many have been seeking a handy magic wand that might produce a reform fix (or, at the very least, give them something they can explain, and wave to voters on prime time television).
Clearinghouses are the wrong remedy for CDS, but that horse has left the barn and is already in the next county. And I must confess, they sound deceptively appealing (I was a proponent early on) until you dig further into how they would work for CDS. They need to be regulated intrusively, with the intent of shrinking the market considerably over time, and like insurance, with tough capital requirements and frequent examinations of the capital adequacy and claims-paying ability of the sponsor. But the real need is to cut off the air supply to CDS to reduce the size of the market so the product itself no longer represents a systemic threat.
Yves Smith in The Fantasy of the Clearing House Magic Bullet « naked capitalism (via quotingthecrisis)
Daniel Indiviglio recently asked: Does anyone out there really understand what the Over-The-Counter (OTC) Derivatives market is? Since I consider myself the resident derivatives wonk at Atlantic Business, I felt compelled to respond. But rather than focus on any particular instrument or issue, I thought it would be best to focus on the overall structure of the market - who the people in the market are, what they do, and what relationships they have to each other - and leave the banker-bashing to somebody else.
How to Understand The Derivatives Market - The Atlantic Business Channel The ratio of people who talk about credit default swaps to those who understand how they work must be staggering. I’ll admit, my understanding was more superficial than I realized. This article goes through the details of exactly how these instruments work, and why they are unique. (via financegeek)
Berkshire Hathaway wrote less than half the amount of reinsurance in 2008 as it did in 2006, and that 2009 will be substantially lower still. He relates this development to Berkshire’s credit rating, which was downgraded from triple-A by Moody’s in April.
Why Berkshire’s Cutting Back on Reinsurance — Seeking Alpha It seems that Berkshire is in the midst of a negative feedback loop. The riskier their position is perceived, and the costlier it is to back the reinsurance with CDS, the less reinsurance they can do. Doing less reinsurance, however, cuts into their bottom line which makes them riskier still. Basically, Berkshire needs to be in good health in order to be in good health. I’m sure Warren Buffet has a plan for this, since a decline in credit score and rise in CDS spreads would be part of any “doomsday scenario”, but it will be interesting to see what exactly that entails. Thankfully, Berkshire Hathaway is a ridiculously large and diversified company, which puts them in a far better position than a freestanding insurance company. (via financegeek)
Almost a year after A.I.G.’s collapse, despite a tidal wave of outrage, there still has been no clear explanation of what toppled the insurance giant. The author decides to ask the people involved—the silent, shell-shocked traders of the A.I.G. Financial Products unit—and finds that the story may have a villain, whose reign of terror over 400 employees brought the company, the U.S. economy, and the global financial system to their knees.
In my view, CDS contracts and complex structured assets are deceptive by design and beg the question as to whether a certain level of complexity is so speculative and reckless as to violate US securities and anti-fraud laws. That is, if an OTC derivative contract lacks a clear cash basis and cannot be valued by both parties to the transaction with the same degree of facility and transparency as cash market instruments, then the OTC contact should be treated as fraudulent and banned as a matter of law and regulation.
Over-the-Counter Derivatives: Modernizing Oversight | The Big Picture (via financegeek)
In the early days of the credit crisis, some in Congress wanted to ban financial derivatives. Others wanted a Financial Product Safety Commission, modeled on the Consumer Product Safety Commission, with a bureaucracy to approve or recall financial instruments. The good news is that last week’s administration proposals for how financial markets should operate are focused on better disclosure instead of micromanagement.
So is that it? Is the downturn over? After bouncing off of 6500, or more than half its peak value, and with Citigroup briefly breaking $1, the Dow Jones Industrial Average has rallied back more than 1200 points. So, is it safe to go back in the water? Best to figure out what went wrong first — what I like to call a bear-raid extraordinaire.
Treasury will attempt to claw back some of the $160M being given out by AIG in “performance bonuses.”
We have to continue managing our business as a business — taking into account the cold realities of competition for customers, for revenues and for employees.
AIG’s Edward Liddy (CEO) on why bonus payments were required
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