SSRN-The Promise and Perils of Credit Derivatives by David Skeel, Frank Partnoy »
Posted By deathray 6 months ago in Business & Finance
In this Article, we begin what we believe will be a fruitful area of scholarly inquiry: an in-depth analysis of credit derivatives. We survey the benefits and risks of credit derivatives, particularly as the use of these instruments affect the role of banks and other creditors in corporate governance. We also hope to create a framework for a more general scholarly discussion of credit derivatives.
Read Full Story at papers.ssrn.com »
565 Views Share Story 24 Comments Report
Submitted By:
deathray
Hm...summarizing a life...Investment banker, sailor, unintentional gourmet cook. Ex US Naval officer, also Foreign Service. Split my time between NYC and Miami Beach ...
RSS Join the Discussion
+ Add CommentComments So Far: 24 (view all)
-
100%
deathray6 months ago
This comment is below the standard viewing threshold View It »
i posted this so jordan11's eyes would glaze over again.
Reply
well, you are going to have to download the article, and it's fairly dry, wonky reading, but it's the best more or less lay description of the derivatives instruments that have brought the world economy to the brink of devastation...
now that i've excited all of you into reading this, please do; it's important to have a solid understanding of these instruments in order to evaluate the monetary policy moves being made by the fed and the treasury. -
-
100%
uncle-dave6 months ago
This comment is below the standard viewing threshold View It »
If you think jordan11’s eyes glazed over you should see mine! You couldn’t make a mark on them with a diamond tipped stylus, but since I’ve already downloaded it I will read on.
Reply
I think dadesider is an optimist it’ll take me a little longer to read it and comment by next Thursday.
On the first page they used the word “bet”. Sounds more like Vegas than Wall Street.
You’ll have to excuse me now, but I have to get back to my reading.-
100%
beavith16 months ago
This comment is below the standard viewing threshold View It »
Wall Street is (or at least WAS) an organized betting parlor, but the bet is on value.
Reply
if you think company A is going to have a good year and pay a nice dividend, you'd buy more of that stock. as more people did so, you and the other buyers would bid that stock price up.
that when puts and calls come into play. those are bets on the marginal increase/decrease of the prices.
derivatives are bets on the change in RATEs of increases/decreases. see the Black-Stokes equation. did you ever think to see calculus in real life? yes Virginia. it really has a use. (chuckle)
that's the economics.
now the politics.
what we are living is the reality of WallStreet coming up with deals on deals that the Gov't doesn't have the mental/technical or political horsepower to oversee. i'm not begging for more regulation. i'm begging for oversight.
-
-
100%
Radiofreeeuropa6 months ago
This comment is below the standard viewing threshold View It »
Dry but completely engrossing in terms of understanding these "instruments". It still seems the ability to bundle a bunch of these things together in a pinata of sorts is much like playing hot potato. Who holds the pinata when the contents are revealed to be undesirable loses. BUT, not really because they pass their losses on to the public. Yet the profits are private. Win Win for some privileged few.
Reply -
-
100%
lfergie8126 months ago
This comment is below the standard viewing threshold View It »
I read an article in Newsweek or Times about the Bush S.E.C.appointment Christopher Cox being asleep on the job while these companies took high risk with these credit derivatives. He never questioned anything they did and allowed them to conduct this business even though others in his commission were warning him of the danger of what they were doing. He turned his head the other way and allowed it to continue.
Reply
I found this article from the Times that pointed out that he was a friend of the corporations. Boy did they hit the nail on the head with this one.
http://www.nytimes.com/2005/06/03/business/03cox.h...-
100%
lfergie8126 months ago
This comment is below the standard viewing threshold View It »
Here's the story in the Times.
Reply
http://www.time.com/time/magazine/article/0,9171,1...
Funny thing, The American Spectator tried to refute the story by calling the Times article "an utterly counterfactual and intellectually dishonest hit piece against Chris Cox, the conservative former chairman of the Securities and Exchange Commission."
Should I be surprised? LOL
-
-
-
-
100%
tchef6 months ago
This comment is below the standard viewing threshold View It »
Very interesting read. I now understand the role derivatives play much better. I still have a major problem with "short selling" stock. As the article pointed out if a hedge fund holds the derivatives on a company and is also borrowing that companies stock to short sell it, what incentive does it have to do what's best for the company in question? To me if you don't own a stock you shouldn't be able to sell it. And who lends out their stock and why? What benefit do they get?
Reply-
100%
deathray6 months ago
This comment is below the standard viewing threshold View It »
to answer your first question: the hedge fund doesn't have the best interest of the company whose stock it holds; the interest of the hedge fund is to make the greatest profit possible on the greatest leverage possible.
Reply
now on the rest:
when you set up an account with a broker, you set up either a margin account or a cash account. a short sale is the sale of a security that isn't owned by the seller, but that is promised to be delivered...through the margin account.
a margin account is a way to leverage the capital and securities you own to purchase additional investments without having to invest any additional capital. you simply borrow from your broker to buy more securities. the broker will charge you interest on the borrowed money and use all the securities (those already in your margin account and the ones you just bought) as collateral.
note that the risk of trading on margin is greater than trading in a cash account because you can, in theory, lose more money than you started with in your account.
-
-
100%
Progressive6 months ago
This comment is below the standard viewing threshold View It »
Thanks for the invite, deathray--and for reminding me why I let my license lapse.
Reply
It's an excellent article, as are your comments above...but for lay people who can't quite make it through all 33 pages, I offer this link to a 7-page Niall Ferguson article I submitted several months ago:
http://www.vanityfair.com/politics/features/2008/1...-
100%
deathray6 months ago
This comment is below the standard viewing threshold View It »
the vanity fair article is an excellent review, and provides the current situation in it's appropriate historical context.
Reply
additionally, there is an excellent article by matt taibbi in the current rolling stone issue on how goldman sachs (my professional alma mater) runs washington dc...unfortunately, it's not available online :(
-
-
-
-
100%
tehranchik6 months ago
This comment is below the standard viewing threshold View It »
Let's just say I am dumbfounded and amazed at the complexities of the rules and regulations of how we deal with money and finance in the world today.
Reply
I remember watching Sharon Watkins testify during the Enron scandal. The derivatives , the off-shores and terms I'd never heard of before. It was fascinating but sometimes I thought 'she's speaking in another language'.
I would need hours of tutoring to understand how it all works. - Buying bad debt - that's a biggy for me.
What I meant in my previous comment was ' it's all greek to me.'
-
-
Add a Comment
Sign In With Your Propeller Account
Please keep your comments relevant to this story.
To create a live link, simply type the URL (including http://) or email address and we will make it a live link for you. You can put up to 3 URLs in your comments. Line breaks and paragraphs are automatically converted — no need to use <p> or <br /> tags.