Relevant and even prescient commentary on news, politics and the economy.

In Other News, Larry King is Selling Divorce Insurance

Many months ago, I quoted the brilliant Janet Tavakoli‘s book Credit Derivatives and Synthetic Structures:

The trader then went on to tell me that Commercial Bank of Korea would sell credit default protection on bonds issued by the Commercial Bank of Korea.
“That’s very interesting,” I countered, “but the credit default option is worthless.”
“But people are doing it,” persisted the trader.
“That’s because they don’t know what they’re doing,” I affirmed. “The correlation between Commercial Bank of Korea and itself is 100 percent. I would pay nothing for that credit protection. It is worthless for this purpose.”
The trader mustered his best grammar, chilliest tone, and most authoritative voice: “There are those who would disagree with you.” (p. 85)

Apparently, that anonymous trader—or another money-losing risk-mispricing hedge fund manager—is now running The Big C:

Credit specialists at Citi are considering launching the first derivatives intended to pay out in the event of a financial crisis. The firm has drawn up plans for a tradable liquidity index, known as the CLX, on which products could be structured that allow buyers to hedge a spike in funding costs….

“The great thing about the index is that it hedges your funding costs while being very simple to trade. I believe it will reduce the systemic risk in the industry, akin to how the advent of swaps means people don’t worry about interest-rate exposures any more – they just pay a fee to hedge it,” he says.

Because if funding dries up, The Big C will be there to support you!

I thought this was an attempt to make money on a premium, but it isn’t:

Like a swap, the contracts envisaged by Citi would be entered into without an up-front premium, with money changing hands according to the index’s movements around a fair strike value.

So the model is actually that you pay a higher cost of funds during good times, and during bad times, depend on the ability of your counterparty to make you whole.

When banks do it, it’s called “deposit insurance,” and it is valuable because in the worst-case scenario, the U.S. Treasury can print money. Since—the last time I checked—Citigroup cannot do that, the option is as valuable as the ability of the bank to perform in a crisis. How did that work out last time?

Via my usually source for financial information.

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Examining The Damage to the NYC-area Economy

Being a seven-hour drive away, I don’t have as much direct knowledge of the NYC economy as I did a year or so ago. So I have to rely on Different Metrics.

Here is one DrektheUninteresting (see #6) (of Scatterplot and Total Drek fame) will love, when he resurfaces.

For those who want a contemporary view of how bad things have gotten in the U.S. economy in general and NYC, just check out the result of this eBay auction.

The winning bid was $10,250. The last time this item was auctioned, a mere six months ago (though in Los Angeles), it went for $12,000.

And a mere three years ago, the item was sold, in NYC, to two separate bidders (it being relatively non-rival), for $20,000 each.

Forget housing prices. If you want a metric to judge the decline of the NYC-area economy, just consider the decline in bidding even as the value of the underlying has gone up.

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