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Tag >> credit-default swap
Jun 11

Crunch time for financial reform

Posted by Ron F in Volcker RuleRegulationPaul Volckerfinancial reformfinancial crisisderivativescredit-default swapcomplianceBernankeBanksBankingbailouts

Ron F

I'm as a big a fan of Paul Volcker as the next guy but am struggling to understand why he objects to the so-called Lincoln amendment. All it would do at the end of the day is force banks to separately capitalize their derivatives operations, as Simon Johnson explains today.

I can understand why the bank lobby is against the idea. More capital would make their operations less profitable. But that's also the only way to make them less risky as well.

May 12

The vanishing case for naked OTC swaps

Posted by Ron F in RiskRegulationderivativescredit-default swapCongresscompliancebanking reform

Ron F

The argument going on in Congress over the virtues of naked swaps for corporate hedging, or their lack thereof, is being echoed in the blogosphere today.

There are two posts on the topic at Berkeley economist Brad DeLong's site, for example. And in this one, a defender of such swaps points out that he has testified in Congress that companies need them to hedge business risk. He cites the hypothetical case of John Deere selling tractors in Greece. While the company could not buy swaps against the dealers themselves, he notes, it could easily hedge the risk they represent by buying a swap against Greek sovereign debt. Yet this proponent of swap nudity says that would not be possible under the amendment proposed by Senator Byron Dorgan.

May 04

How much due diligence was possible on Abacus?

Posted by Ron F in RiskGoldman Sachsfinancial crisisderivativesdefaultscredit-default swapcompliancebanking reform

Ron F

Either Andrew Sorkin or Warren Buffett is wrong about the due diligence that was possible for investors to undertake on the dodgy securities in the Abacus deal that are at the heart of the SEC's case against Goldman Sachs. Or perhaps both Sorkin and Buffett are wrong.

Sorkin says Buffett has no sympathy for the investors who lost money on the deal, chiefly the German bank IKB and the Dutch bank ABN Amro.

Apr 29

Pulling apart Goldman's Abacus defense

Posted by Ron F in TradingSecurities and Exchange CommissionRiskRegulationGoldman Sachsderivativescredit-default swapcomplianceBanksbanking reform

Ron F

Goldman Sachs' defense of its actions in creating the Abacus deal that landed it in hot water with the SEC rests on the bank's claim that its role was that of a market maker, not an underwriter.

Essentially, the bank is saying it was doing nothing that market makers don't normally do when taking the other side of a deal to execute a client's trade.

Apr 28

Why corporate users of derivatives should favor reform

Posted by Ron F in RiskRegulationGoldman Sachsfinancial crisisfailurederivativescredit-default swapcost of capitalcorporate treasurersCFObanking reformbailoutsAIGAccounting

Ron F

It's hard to see why CFOs who want to use derivatives to hedge risk would oppose efforts to improve the transparency and collateral backing swap trades. But according to this New York Times article, such opposition persists.

As we reported last week, however, proposals to require trading of standardized derivatives through exchanges or at least settle the transactions through central clearinghouses would require counterparties to post more collateral but mitigate, at minimum, any increase in cost through narrower spreads between bid and asked prices.

Apr 22

The Naked and the Dead? New bill would limit OTC swaps to hedging

Posted by Ron F in RiskRegulationfinancial crisisderivativescredit-default swapcomplianceCDSbanking reformbank failures

Ron F

The bill that was approved yesterday by the Senate Agriculture Committee correctly would let the Commodities Futures Trading Commission defer to state laws that limit the use of derivatives for purposes of speculation.

By doing so, the bill would effectively curb so-called "naked swaps," those that aren't traded on exchanges or cleared centrally and where neither party has an insurable interest at stake, because those swaps would no longer be enforceable in court. In other words, only a party using a swap to hedge could sue to go after its counterparty's assets if it failed to hold up its end of a deal.

Apr 21

Goldman's other disclosure problem

Posted by Ron F in Wells NoticeSecurities and Exchange CommissionRegulationJP Morgan ChaseGoldman SachsGeneral Electricfinancial crisisfinanacial reportingcredit-default swapCongresscomplianceBanksbanking reformBankingBank of AmericaauditingauditAIG

Ron F

This is seriously speculative stuff on my part. But I wonder if the other shoe that Carl Levin says is about to drop on Goldman has to do with its failure to disclose the fact that it received a Wells Notice from the SEC last July about the Abacus deal.

Yes, the bank claims it was immaterial, just as it claims was its lack of disclosure of hedgie John Paulson's role in helping to design the CDO to go south so he could profit by shorting the deal was immaterial.

Apr 19

Goldman case another sign of need to curb naked swaps

Posted by Ron F in Securities and Exchange CommissionRiskRegulationGoldman Sachsderivativescredit-default swapCDSBanksbank failuresbailoutsAIG

Ron F

It seems as if Goldman Sachs' essential defense in the SEC's fraud case against the bank is that it did nothing differently than other banks typically do in failing to disclose to investors that a hedge fund that wanted to short the securities the bank sold helped design them.

But if the "everybody-does-it" line gets Goldman off the hook, then what does that say about Wall Street? Simon Johnson argues that it means that fraud is now its very basis.

Mar 25

Why financial innovation is overrated

Posted by Ron F in RiskRegulationfinancial crisisderivativescredit-default swapcomplianceBanksbanking reformbailouts

Ron F

Next time you hear bank lobbyists complain that regulation will extinguish innovation, direct them to the work of these folks.

Yes, they're a trio of pointy-headed academics, and European to boot. But what's the industry's response to their findings that "rents rise progressively to the point where the agents end up capturing the bulk of the return from the innovation?"

Mar 25

Banks face a fresh round of losses from fair value accounting

Posted by Ron F in FASBderivativescredit-default swapcomplianceCDSBanksAccounting

Ron F

New accounting rules for derivatives may lead to new bank losses, if I read this article correctly.

The new rules, which go into effect on June 15, would require owners of collateralized debt obligations that hold credit default swaps along with other assets, to mark the swaps to market. And that's led some experts to predict that investors to unwind the securities to avoid the mark-downs.

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