Legal Commentary

The truth about the CDS market

Posted on January 27, 2009
I'm not wild about Peter Wallison's piece, "Everything You Wanted to Know about Credit Default Swaps?but Were Never Told." I may write a separate post on Wallison's piece. But for now, if you want to know the truth about the CDS market, read these two pieces by Satyajit Das:Surreal Realities of the CDS Markets - Part 1Surreal Realities of the CDS Markets - Part 2Das' views on the CDS market closely mirror my own...

My GOD Gretchen Morgenson Is Stupid

Posted on January 26, 2009
Sadly, Tanta is no longer around to shred the idiocy that Gretchen Morgenson produces. That's too bad, because Morgenson's column on credit default swaps yesterday was a doozy.It's hard to know what to say about a column that's so detached from reality...

Thank the Lord

Posted on January 26, 2009
This is the best sentence on the New York Times op-ed page today:This is William Kristol?s last columnDon't let the door hit you on the way out.

WSJ: Dudley likely to be NY Fed President

Posted on January 26, 2009
Now that the Senate has confirmed Geithner, we'll find out who the new President of the New York Fed will be (an extremely powerful position). The WSJ says it's likely to be William Dudley, who currently runs the NY Fed's markets desk:Mr. Geithner's confirmation will free the Federal Reserve Bank of New York to announce his successor as president of the regional Fed bank...

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Why why shouldn't force banks to lend

Posted on January 26, 2009
A surprisingly common criticism of the TARP is that it didn't require banks receiving bailout money to lend to small businesses and consumers. Joe Nocera of the NYT penned a whole column about "the dirty little secret of the banking industry," which was that "it has no intention of using the money to make new loans...

Merrill and the Basis Trade

Posted on January 25, 2009
Felix Salmon is wondering, after reading this WSJ article, if the main source of Merrill Lynch's staggering $15bn loss in Q4 was the infamous "basis trade."In a basis trade, an investor buys a corporate bond and simultaneously buys CDS protection on the bond...

Obama Administration on Credit Default Swaps

Posted on January 24, 2009
At least the Obama administration (Tim Geithner really) recognizes that a CDS clearinghouse won't magically heal the financial markets, and won't even touch a huge segment of the CDS market. Contemporary politics being the three-ring circus that it is, I suppose that's all you can really hope for...

Outrageous

Posted on January 22, 2009
I suspect there's more to the story, but suffice it to say that if true, then this is an outrageous stunt:Merrill Lynch took the unusual step of accelerating bonus payments by a month last year, doling out billions of dollars to employees just three days before the closing of its sale to Bank of America...

Ken Lewis to meet with Thain on "his future"

Posted on January 22, 2009
In addition to this morning's revelations in the FT regarding Merrill's bonus payments stunt, CNBC is now reporting that John Thain spent $1.2m to redecorate his office.Apparently Ken Lewis has had enough. I don't blame him. From Bloomberg:Bank of America Corp...

Financial Market Bobbleheads

Posted on January 22, 2009
Christopher Whalen, the managing director of a firm called Institutional Risk Analytics, is a ubiquitous commentator on financial markets. This is despite the fact that, from everything I've seen, he's totally crazy. Par for the course when it comes to financial market bobbleheads, I suppose...

Quote of the Day

Posted on January 21, 2009
From Frank Partnoy, writing in the FT:When a company pays out more in compensation than its market capitalisation, as Citigroup did, the end is near.Hard to argue with that.

S&P Launches Three CDS Indexes

Posted on January 21, 2009
Now you can compare (most of) the S&P 100 equity index with a corresponding index based on CDS market prices. From the WSJ:Ratings agency Standard & Poor's Wednesday launched a new index to help investors compare the performance of the US equity- and credit derivatives markets...

Suspend State Sales Taxes!

Posted on January 21, 2009
The main point of a fiscal stimulus package is to offset the decline in consumer spending, which accounts for over 70% of GDP. We need to avoid the Paradox of Thrift, and all that. As Paul Krugman put it:[W]hat the economy needs now is something to take the place of retrenching consumers...

Keeping a CDS clearinghouse in perspective

Posted on January 17, 2009
A central clearinghouse for credit default swaps (CDS) will undoubtedly provide benefits to the CDS market: increased transparency, a reduction in counterparty risk, efficient multilateral netting, a uniform valuation method, etc.But commentators seem to believe that a CDS clearinghouse is a "solution" to the problems in the CDS market...

Sheila Bair Hearts Derivatives

Posted on January 16, 2009
Sheila Bair has become something of a hero to some progressives, supposedly because she's "a principled regulator who stood up against the good ole boys club." Apparently all you have to do to become a "principled regulator" is spit out a bunch of vague platitudes to naïve journalists about how we should help "ordinary Americans" instead of Evil Wall Street Banks...

Bloomberg on CDS clearinghouses

Posted on January 15, 2009
Bloomberg has a story headlined, "ICE Emerges as Credit-Default Swap Clearinghouse Frontrunner":Intercontinental Exchange Inc., the second-largest U.S. futures market, is emerging as the leading candidate to run a clearinghouse for the $29 trillion market for credit-default swaps...

Getting the Signals Crossed

Posted on January 14, 2009
Now we know why the Obama administration asked President Bush to go ahead and request the remaining $350 billion of TARP funds: Bank of America needs another bailout. No details are available yet, but everyone's assuming that the BofA deal will be roughly similar to the deal Treasury struck with Citi in November...

The Price of Restructuring: CDS Market vs. BIS

Posted on January 14, 2009
Relating to my discussion yesterday of whether the BIS should reduce the penalty for excluding the "modified restructuring" (Mod-R) credit event from CDS contracts, which is currently a 40% reduction in capital relief, a friend at a dealer bank has informed me that the spread between contracts with Mod-R and contracts with no restructuring credit event (known as "No-R") is roughly 9 basis points...

Yglegias on Affordable Housing

Posted on January 13, 2009
Matt Yglesias is on the right track regarding affordable housing, but he still makes a couple important mistakes:At the margin, adding new market-rate housing units reduces the cost of housing, making housing more affordable. In other words, given a choice between a project with 20 affordable units and 20 market-rate ones or a project with 40 market-rate units the former is more desirable from an affordability standpoint...

Ah, Politics

Posted on January 13, 2009
Every time you forget how cartoonishly unserious the world of politics is, something like this comes along to remind you:Sen. Charles E. Grassley, ranking Republican on the Senate Finance Committee, is raising questions about a housekeeper who worked briefly for Treasury Secretary-nominee Timothy Geithner without proper immigration papers, and multiple years when Mr...

Important changes afoot in the CDS market

Posted on January 13, 2009
Continuing my recent credit default swap theme, I'm going to discuss a couple of important changes in the CDS market that are now imminent.First, after talking about it for years, market participants in the US have agreed to drop the "restructuring" credit event ? which is actually called "modified restructuring," and is commonly known as Mod-R ? for standard US single name CDS...

Et tu, Smithsonian?

Posted on January 12, 2009
TPM flags a whopper in the caption beneath the Smithsonian's new portrait of George W. Bush (which is fortunately being disputed by Sen. Bernie Sanders):The current wording of the caption states that Bush's term was marked by "the attacks on September 11, 2001, that led to wars in Afghanistan and Iraq...

Regulating the CDS market

Posted on January 11, 2009
I've received a few requests for my thoughts on various forms of regulation for the CDS market. When I was working on credit default swaps in the first half of this decade, during the big push to standardize CDS contracts, I never in my wildest dreams thought that CDS would become a popular topic of discussion, or that anyone outside the world of structured finance law would ever willingly ask me to discuss CDS!First of all, I think it's very clear that the current regulatory posture?that is, an unregulated dealer-driven OTC market?is not a viable option anymore...

Rodge Cohen as New York Fed President?

Posted on January 10, 2009
The WSJ reports a few more names on the list of candidates interviewing for the powerful position of New York Fed President.The most intruiging one is Rodge Cohen, the legendary Sullivan & Cromwell chairman. If they could get him, Cohen would be a fantasic choice...

NYT Graphics

Posted on January 03, 2009
I like to beat up on NYT reporters as much as anyone?they haven't had a good financial reporter since Peter Truell, and Gretchen Morgenson is awful.But let's not kid ourselves: the NYT can put together some amazing graphics. I wish there was a page on the NYT's website for just graphics (or as Barry Ritholtz would say, "chart porn")...

Booyah

Posted on January 03, 2009
Linklaters?the first firm I ever worked for, all those years ago?comes in at #1 in M&A for 2008.Believe it or not, league tables are actually a big deal in the high-pressure, surprisingly high school-ish, thoroughly miserable world of Wall Street law firms.

Give Hank Greenberg Some Credit

Posted on December 30, 2008
The Washington Post's series on AIG Financial Products is actually quite good so far (see Part I here, Part II here).But in its history of AIGFP, I think the Post gives short shrift to Hank Greenberg. I'm dating myself a bit with this story, but here goes: Back in the early 1990s, when AIGFP was being run by former Drexel Burnham executive Howard Sosin, Greenberg had to set up a shadow group to infiltrate AIGFP (his own subsidiary!), which the Post article refers to in passing...

New Derivatives Data

Posted on December 29, 2008
The OCC released its Q3 report on trading and derivatives activity today. There appears to be minimal data on Morgan Stanley, and no data on Goldman Sachs, the two newest bank holding companies. That's only fair, I guess, since MS and GS only became bank holding companies in the very last days of Q3...

Was the LTCM Bail-In a Mistake?

Posted on December 29, 2008
Tyler Cowen, in his Sunday New York Times column, says yes. His reasoning, however, leaves much to be desired.Tyler argues that by saving Long-Term Capital Management (LTCM), regulators missed a golden opportunity to teach the markets a much-needed lesson in moral hazard:With the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed ? as long as the collapse of those institutions would threaten the global credit system...

CDS News

Posted on December 23, 2008
Well, a href="http://online.wsj.com/article/BT-CO-20081222-712075.html?mod=wsjcrmain"this/a is surprising:blockquoteCME Group Inc. (CME) is in advanced discussions with six dealers to take equity stakes in its credit-default swap trading and clearing platform, as it lines up against a rival backed by nine of the market's largest participants...

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