Economic and Political Jargon - Beyond Comprehension

Just caught a Bloomberg head talking for ten minutes about "legacy assets" repeatedly. It took me five minutes to work out that he was talking about bad debts (or items of 0 worth).

cactus flower wrote:

Just caught a Bloomberg head talking for ten minutes about "legacy assets" repeatedly. It took me five minutes to work out that he was talking about bad debts (or items of 0 worth).

As I said, I'm still in favour of making them replace "sub-prime" with "dodgy". The whole damned credit crunch translates very simply then into "we made a load of dodgy loans to people who probably couldn't pay them...they didn't pay them, and now we're all stuffed."

"I don't know what's a tracker mortgage"

Credit Default Swaps ... - someone takes the debt off someone else ??

Auditor #9 wrote:

"I don't know what's a tracker mortgage"

Credit Default Swaps ... - someone takes the debt off someone else ??

As investopedia didn't have it :

wikipedia wrote:

A credit default swap (CDS) is a credit derivative contract between two counterparties, whereby the "buyer" or "fixed rate payer" pays periodic payments to the "seller" or "floating rate payer" in exchange for the right to a payoff if there is a default[1] or "credit event" in respect of a third party or "reference entity".

If a credit event occurs, the typical contract either settles by delivery by the buyer to the seller of a (usually defaulted) debt obligation of the reference entity against a payment by the seller of the par value ("physical settlement") or the seller pays the buyer the difference between the par value and the market price of a specified debt obligation, typically determined in an auction ("cash settlement").

A credit default swap resembles an insurance policy, as it can be used by a debt holder to hedge, or insure against a default under the debt instrument. However, because there is no requirement to actually hold any asset or suffer a loss, a credit default swap can also be used for speculative purposes and is not generally considered insurance for regulatory purposes.

wtf

Auditor #9 wrote:

Auditor #9 wrote:

"I don't know what's a tracker mortgage"

Credit Default Swaps ... - someone takes the debt off someone else ??

As investopedia didn't have it :

wikipedia wrote:

A credit default swap (CDS) is a credit derivative contract between two counterparties, whereby the "buyer" or "fixed rate payer" pays periodic payments to the "seller" or "floating rate payer" in exchange for the right to a payoff if there is a default[1] or "credit event" in respect of a third party or "reference entity".

If a credit event occurs, the typical contract either settles by delivery by the buyer to the seller of a (usually defaulted) debt obligation of the reference entity against a payment by the seller of the par value ("physical settlement") or the seller pays the buyer the difference between the par value and the market price of a specified debt obligation, typically determined in an auction ("cash settlement").

A credit default swap resembles an insurance policy, as it can be used by a debt holder to hedge, or insure against a default under the debt instrument. However, because there is no requirement to actually hold any asset or suffer a loss, a credit default swap can also be used for speculative purposes and is not generally considered insurance for regulatory purposes.

wtf

Boggling. You need to start further back. It's a credit derivative:

"In finance, a credit derivative is a derivative whose value derives from the credit risk on an underlying bond, loan or other financial asset. In this way, the credit risk is on an entity other than the counterparties to the transaction itself.[1] This entity is known as the reference entity and may be a corporate, a sovereign or any other form of legal entity which has incurred debt.[2] Credit derivatives are bilateral contracts between a buyer and seller under which the seller sells protection against the credit risk of the reference entity.[3]"

To put it another way, if I hold the debt of the Jones family, you can sell me "insurance" against the Joneses defaulting on their debt. The amount I pay you depends on how high the market thinks the risk of that default is. I pay you regular fixed amounts (the "insurance premium"), in return for which you guarantee to pay me the worth of the debt (or other part-payment) in the event the Joneses default, or to take over the debt from me, so I don't have to assume it myself.

I remember of fairly prominent Wall Street banker giving us a lecture on options. Instead of talking about Black-Scholes models, betas, alphas and all sorts of jargon, he cut to the bottom line. The futures markets was where the real users (growers, manufactureres, etc) of futures prices did their business. The options markets were essentially a casino. The people who made the mega bucks in the options markets did so at the very beginning of the scheme when those who didn't know what options were really about were fleeced by those who were in the know. There might be some utility in the options markets but only for fairly sophisticed investors to hedge (insure) against already realised profits.

Leaving aside Investment banking, which really was set up to make commissions from commodity trading and to manage stock issuance, traditional banking is ever so simple. Those with excess cash lend it to those who need cash. Bankers are supposed to be professionals who can analyse risk and reward. Full stop.

All the other stuff is bells and whistles and meant simply to mystify those who are not in the know. It appears that things like MBS, CDOs, SIVs are all really complicated but simple loans lie at the very bottom of every one of these "initials". The complications only arise from the legalise used to off load the risk from banks onto investors.

An old fiance used to work in mezzanine financing for an investment bank. A simple $50 million dollar deal would involve a prospectus that was at least several inches thick. What many people do not realise about banking today is that as many lawyers are involved in financial deals as are bankers.

[As an aside, the real winners in the "initials" stake has to be the US army. They simply initialise everything. A hammer would be a CBDD = crushing blow delivery device. ]

I am an options player. Most trades are complete losses but if you get a big win it might be 20 times.

I will explain what Credit Default Swap is. A person buys a bond off a company. He is in fact lending the company money and the company will pay him back monthly for say 10 years. Principle plus interest. If he holds for 10 years his only worry is that the company will fold and default on the bond. So Credit Default means the bond defaulting and becoming worthless.

To cover this possibility he can pay a bit extra to an insurance company to insure the bond. Then if it defaults the insurance company will pay the remainer of principle and interest.

This is the "swap" part. The risk of default has been swapped from the buyer to the insurance company. These CDSs can be traded back and forth and their value changes if the risk of default rises or drops.

Had AIG gone bankrupt then a lot of bonds would no longer have insurance. The greater the risk the higher the premium. The CDS SPREAD is the premium or the difference between what the bond pays, say 8% and what must be paid when the premium is added, say 8.6%. The CDS Spread is 0.6%

I say another poster today say that CDS Spread on US Treasuries was .3%. This is very high as one would think that the chance of default would be practically zero. When I checked it Monday it was .18 having risen from .06.

This is alarming as it indicates that the market thinks that the chance of a US default on it's bonds is 5 times greater than it was a while back

youngdan wrote:

I say another poster today say that CDS Spread on US Treasuries was .3%. This is very high as one would think that the chance of default would be practically zero. When I checked it Monday it was .18 having risen from .06.

This is alarming as it indicates that the market thinks that the chance of a US default on it's bonds is 5 times greater than it was a while back

It's a lot clearer now for your and ibis explanation. Gambling on risk. Could it end up that someone is gambling on whether or not one of us will pay our mortgages and not default or if we'll pay our credit card bills each month? How far could it go - people gambling next on whether we'll pay our domestic bills

Is the 10 year treasury note linked to the above CDS? Someone buys a US bond note which might be as you say a loan to the US and there's an insurance on top of that to cover the US defaulting on payments of its 10 trillion national debt?

If it did default the country might just kill the military budget one or two months and get back to normal no?

3 trillion on Iraq alone so far according the Stiglitz.

The Treasury issues the bond. They have no part in the insurance part of it. Now insurance on US bonds is a bit hard to fathim out at the best of times. If default occurs the dollar is worthless so having insurance paid in dollars is worthless too. But they can still be traded. Anything that can be traded usually is.

youngdan wrote:

The Treasury issues the bond. They have no part in the insurance part of it. Now insurance on US bonds is a bit hard to fathim out at the best of times. If default occurs the dollar is worthless so having insurance paid in dollars is worthless too. But they can still be traded. Anything that can be traded usually is.

Finfacts posted this today - http://www.finfacts.ie/irishfinancenews/article_1014748.shtml

Credit-default swaps on more than $62 trillion in debt are a toxic time bomb in the process of exploding.

Jim Power on Radio 1 with Tubberty now talking about buying and selling irish bank shares, hedge funds and other jargon presumably. I'll put a link here later if there is one.