Comments on: The nonsensical political rhetoric on Greece A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Danny_Black Wed, 03 Mar 2010 03:28:32 +0000 Well technically, AIG became insolvent because of two facts:

1) The price declines on the underlying bonds – not defaults – triggered more collateral payments.
2) The downgrades of AIG also triggered more collateral payments.

The defaults on the subprime bonds were tangential to AIG’s bankruptcy.

By: johnhhaskell Tue, 02 Mar 2010 06:31:07 +0000 JohnBarrdear- good point, there is no regulatory requirement to set aside capital against an event of default.

Since anyone can trade CDS’s, why don’t you just sally into the market offering to write say 100 billion euros of protection on Greece?

I’m sure you will be accepted as a creditworthy counterparty.

By: M.G.inProgress Tue, 02 Mar 2010 06:24:43 +0000 Never mind if you are pro or against CDS. Just tax them heavily…

By: HBC Tue, 02 Mar 2010 01:20:38 +0000 Never mind the rhetoric – it’s the Goldman Sachs Pistols!

By: najdorf Tue, 02 Mar 2010 00:17:08 +0000 Wismar: I assume some sarcasm in your post. If I’m right, I suppose you believe that a male journalist ought never to call a female politican clueless, even when she is in fact clueless based on the evidence of her quote? Is this attitude not more chauvinistic than simply calling ’em like you seem ’em in a gender-neutral fashion? Do you think a woman who makes it to the U.S. Congress representing Manhattan is such a delicate flower that she can’t accept a bit of criticism on the facts?

I’m not sure why, three years into massive discussion of CDS, we haven’t yet reached the obvious conclusion that CDS are indicative of speculators dealing with other speculators in a zero-sum game. The only regulations they require are clear marketing rules so that banks can’t stuff retail/pensions too aggressively and clear collateral/netting/resolution rules to minimize systemic risk. If you think they’re temporarily dislocating credit markets you should be THRILLED about the prospects of free reversion-to-the-mean profits. If you think more information about speculative interest (which is all it is, since every one of these trades has two sides) is sufficient to bring down healthy institutions, perhaps you need to enquire a bit more closely into the stability of these supposedly healthy institutions. A truly healthy institution can pay a slightly larger spread in uncertain times until it proves its worthiness to the markets. Those whose business model has no volatility tolerance deserve to fail and benefit the rest of us by their departure.

By: csodak Mon, 01 Mar 2010 23:40:57 +0000 I was watching CNN Zakaria’s GPS and it was stated that a German worker would have to delay their retirement by a minimum of 2 years from age 65 to 67 in order to allow a Greek worker to retire at age 55…I’m moving to Greece!

By: JohnBarrdear Mon, 01 Mar 2010 22:41:25 +0000 While, on first glance, I agree with you about Carolyn Maloney, it does seem possible for a “speculator” to profit from a bailout of Greece: simply sell a CDS. I have no idea whether it is possible to short-sell a CDS contract, but even if it’s not, one could presumably create a new CDS and sell it.

Since there is no regulatory requirement to keep back-stop capital against the possibility of a claim against the CDS (as fatefully exploited by AIG), the only limit to potential profit by somebody who successfully forecast a bailout would appear to be in the curvature of demand for default protection.

By: Wismar Mon, 01 Mar 2010 20:57:22 +0000 If I didn’t know better I’d say there was something awfully chauvinist about Felix’s scolding of “Carolyn” for not knowing the “first thing about how credit default swaps work,” unlike big boys like himself.

By: NemoP Mon, 01 Mar 2010 19:44:19 +0000 Any money flowing from Germany to Greece will end up in the pockets of Greece’s bondholders, where it belongs — there’s really no mechanism at all whereby it can end up in the CDS market.


Hypothetical: European bank owns Greek debt. European bank is nervous about Greek default, so buys CDS protection from CDS market. CDS seller, with inside information about pending bail-out (say), walks away with free cash.

So the bail-out money flows to the holder of Greek bonds and from there to the seller of the CDS. Seems like a pretty clear mechanism to me.

The way to avoid this is to make sure the Eurozone banks are not “wasting money” on CDS if a bail-out is coming. As far as I can tell, that is the only reasonable interpretation of the quote from the mysterious “source”.

P.S. In general, arbitrage insures there is never all that much difference between derivatives and underlying. Markets are like that. :-)

By: amsterdammer Mon, 01 Mar 2010 18:53:25 +0000 Maybe you take a read at a view from Europe: The House is
on Fire ! by Paul Jorion
“Ladies and gentlemen of the European regulatory authorities, I am today turning to you: the house is on fire!
Demands that Greece lowers its civil servants’ wages will not save her. Your prodding Greece to tackle tax evasion will not save her. Your offer to establish a… piggy bank (how laughable an idea!), will not save her either. All that is far too little, far too late. It is also beside the point…”