Market crash nobodies fault

[mhaze]

Here's the thing. Without the derivatives then those few initial bad mortgages would have been inspected for sufficient constraints on risk and those conditions thought to cause it weeded out or sold at much higher risk. Being packed into derivatives they were a minor blimp on the total value of the derivative and where therefore allowed to propagate.

It's not cause and effect being argued, it's a case of information flow. If the information about A says that B=A*N and then we replace all A with B we no longer have the information about all A's to set the value of B. The value of A becomes B/N where we must consider all A's equal regardless of the drift in risk associated with individual members of the set of
A. Our knowledge of where the risk is changing is hidden somewhere in the averages of B. It's the same thing when we must give up on knowledge about the position/momentum of any given air molecule to talk about temperature.....

Well, I then must ask: Are you forgetting the 7-28-08 bill signed by Bush that guaranteed 300+B of mortgage subprimes? I calculate this to have been ample to handle all subprimes that did or might fail. Thus they were in fact elevated to the stature of regular federally insured loans.

This should have propagated thru all subprimes and firmed up all values of derivatives based on subprime. The obvious exception would be cases where one of many Slick Shysters takes subprime X and puts it in Derivative A, B, C and D (essentially selling the same thing multiple times). Which is jail time for the perp ...

 

[hamelekim]

Greenspan isn't shocked, he knows human nature, he worked in the banking industry for decades. He's just covering his ass at this point. There were numerous economists who said this would happen, they've been saying it for a long time too. The people who dismissed them either ignored the real evidence or they knew what would happen but let it occur anyway, for whatever reasons.

 

[my_wan]

Well, I then must ask: Are you forgetting the 7-28-08 bill signed by Bush that guaranteed 300+B of mortgage subprimes? I calculate this to have been ample to handle all subprimes that did or might fail. Thus they were in fact elevated to the stature of regular federally insured loans.

This should have propagated thru all subprimes and firmed up all values of derivatives based on subprime. The obvious exception would be cases where one of many Slick Shysters takes subprime X and puts it in Derivative A, B, C and D (essentially selling the same thing multiple times). Which is jail time for the perp ...

I haven't forgotten. This was essentially a stop gap measure though that didn't by any means fix the root of the problem. Even if it payed for every single foreclosure on the books for the foreseeable future the only way to prevent a crash at that point was to continue growing the bubble. Which would only make it worse in the future. The sub-prime borrowers were tapped out and investors were realizing the trouble we were already in. The damage was already done before the collapse and the value of sub-prime derivatives could not be maintained even if the principle was safe. Bubbles always create collateral damage when they pop and the only way to stop a bubble from growing is to pop them. Throwing money at it may ease the repair afterwords but in no way prevents the damage. Once the market dries up then the banks can no longer liquidify their mortgages. Those caught holding positions with these mortgage derivatives are hurt financially and a large portion of their assets may be gone. Even without a single shyster in the bunch it's going to hurt, a lot. Shysters do make it worse.

I don't know of any cases were the same mortgage was placed in multiple derivatives. This would definitely be jail time for those caught, unlike the naked shorts which is essentially counterfeiting stocks itself. We should have no patience for the shysters and little pity in giving them some hefty jail time and fines. We must be careful about who we make the demons out to be though. Even if everybody followed the rules this mortgage bubble was going to hurt badly when it popped.

Greenspan isn't shocked, he knows human nature, he worked in the banking industry for decades. He's just covering his ass at this point. There were numerous economists who said this would happen, they've been saying it for a long time too. The people who dismissed them either ignored the real evidence or they knew what would happen but let it occur anyway, for whatever reasons.

Yes he knows his stance was a mistake now, or should. It really depends on the ontology he attaches to the concept of statistics. He might still hold some notions that this was a freak accident, which can happen rarely, but it's not a very solid position to hold right now. He did buy the theory in 2004 though. There was even a Nobel prize given on the notion that it would work. You must remember that Greenspan thinks almost completely in terms of macro-economics. When demand is created that greatly outpaces supply then the pressure to meet that demand creates all sorts of strategies, even criminal strategies. Greenspan himself suggested in 2004 that alternative debt istruments should be developed. You can look at all the multiple strategies and say this or that strategy was wrong or caused the collapse of demand. Yet it was the mechanism that created the huge demand at the root of the issue. No amount of regulation on supplying that demand is going to stop the bubble from growing so long as that demand exist. The demand was created on the false notion of risk control. The notion that even in a market downturn you could hedge your funds against loss by the mechanism of put-call parity. In a market crash there is no put-call parity, it's all one sided. When people realize that valuations are well in excess due to underestimation of risk you get a crash. It was the Black-Scholes equation or similar thinking that created both the demand due to the perception of low risk and the crash when the bubble got so big that investors started realizing how vulnerable they were, or worse that their portfolios were drying up before they knew what was happening. Any financial institution that actually understood the risk beforehand could have easily avoided getting hurt by the collapse, or even profited from it. Why didn't they? Because they believed they were well hedged and safe.

 

[mhaze]

I haven't forgotten. This was essentially a stop gap measure though that didn't by any means fix the root of the problem. Even if it payed for every single foreclosure on the books for the foreseeable future the only way to prevent a crash at that point was to continue growing the bubble. Which would only make it worse in the future. The sub-prime borrowers were tapped out and investors were realizing the trouble we were already in. The damage was already done before the collapse and the value of sub-prime derivatives could not be maintained even if the principle was safe. Bubbles always create collateral damage when they pop and the only way to stop a bubble from growing is to pop them. Throwing money at it may ease the repair afterwords but in no way prevents the damage. Once the market dries up then the banks can no longer liquidify their mortgages. Those caught holding positions with these mortgage derivatives are hurt financially and a large portion of their assets may be gone. Even without a single shyster in the bunch it's going to hurt, a lot. Shysters do make it worse.

I don't know of any cases were the same mortgage was placed in multiple derivatives. This would definitely be jail time for those caught, unlike the naked shorts which is essentially counterfeiting stocks itself. We should have no patience for the shysters and little pity in giving them some hefty jail time and fines. We must be careful about who we make the demons out to be though. Even if everybody followed the rules this mortgage bubble was going to hurt badly when it popped.

Yes, but if we exclude the 7-28 bailed out subprimes what we are left with is the overall effect of a drop in housing values - note this affects 100% of the market, not 3% (subprimes) Never before has a natural correction in property values caused anything like this.

Sort of related-

http://www.minneapolisfed.org/research/WP/WP666.pdf

I'm still pondering your concept of

"risk control/even in a market downturn you could hedge your funds against loss by the mechanism of put-call parity"
​

And the necessary corellary of how stupid people would have to actually believe it.

 

[Uncayimmy]

I blame stupidity and greed. Stupidity on the part of the legislators and their lack of instigating sufficient overseer institutions w ith real powers. And greed in the sense of the unscrupilous who repackaged the sub-prime loans into shiny new bottles.

C'mon, now, lots of people were greedy and stupid, and that includes the Average Joe on the street. The housing market (like the .com boom before and the oil futures market afterwards) was driven by speculation. Real estate typically appreciates over time. If the appreciation is abnormally high, ask yourself why. If there's no "real" explanation like population growth or running out of land, then what is it?

If a home appreciates by 50% in two years due to speculation, then chances are that it's going to slide backwards at some point. Speculation has to end eventually. There were a number of loan packages that were excellent for speculation, but people started using them to buy homes after selling their current home. Now they are sitting in homes where they have very little invested and the loan amount is greater than selling price. Lots of people are just giving them back to the bank. Other people counted on future appreciation in order refinance in a way they could afford. Now they're screwed.

The banks were just as stupid for making too many of these loans. Multi-family buildings were also hit hard, but it was the same stupidity on both sides. If a building was going for $35K per door in 2004 and now they are selling at $80K per door, are they really *worth* that much? Not really. Are the rents going to go up accordingly? Maybe for a while, but they, too, will drop. Remember, the investors who didn't sell could still afford to undercut the recently purchased buildings.

Lots of people made lots of money, including Average Joe. But when the music stopped, there weren't enough chairs left for everyone to sit down.

In the future how do you deal with a speculative market? I'm no finance expert, but I say you have to take a hard look at appraisals and/or the loan to value percentages. Common sense says that if a building/home appreciated at X% over the last 10 years and at 4X% over the last three years, then the value is most likely overstated. But the bank appraisals *only* looked at the most recent sales.

So either you change the appraisal formula (tricky) or simply decrease the loan to value percentage. Not only does this make the loan safer, but it has the added effect of applying friction on the speculative market. But the key is you can't just look at a six month snapshot to truly appraise the value of real estate.

Of course, doing this means people make less money. Sigh...

 

[my_wan]

Yes, but if we exclude the 7-28 bailed out subprimes what we are left with is the overall effect of a drop in housing values - note this affects 100% of the market, not 3% (subprimes) Never before has a natural correction in property values caused anything like this.

Sort of related-

http://www.minneapolisfed.org/research/WP/WP666.pdf

In the S&L crisis of the 80s banks lost more money than they had made previously in the history of banking in the US. I presume that is un-adjusted dollars. The biggest difference here, the reason such a correction had such a far reaching effect, is that this time the cost/risk was bundled with through derivatives in the portfolios of from nearly every sector of the economy. This includes 401Ks, life insurance, mortgage insurance, bank assets, business assets, etc. My response to the put-call parity issue below articulates this even more.

The S&L crisis was also different in that the increasingly risky behavior was an attempt to survive rather than simply profit. Thanks for the link, that is interesting.

I'm still pondering your concept of

"risk control/even in a market downturn you could hedge your funds against loss by the mechanism of put-call parity"
​

And the necessary corellary of how stupid people would have to actually believe it.

This concept was not mine but has been a fundamental economic assumption since well before even Black–Scholes. When supply and demand is at or near equilibrium this assumption is more than reasonable. Black–Scholes used this put-call parity as the foundation for how to go about evaluating the price/risk of derivatives, then replaces the stock itself with a derivative of the stocks. It spread the risk of a few bad loans over a large group of loans making stock in the derivative safer in theory. This created a huge demand well in excess of the supply of mortgages which is not accounted for in the original put-call valuation. It also made it nearly impossible to see the growth in the risk of these loans because it was spread over such a large group of loans that appeared good at the time. Had these bad loans been restricted to the smaller entities making them, or the specific underlying stock, the real risk as well as the source of that risk would have been obvious years ago. This is what I mean when I claim that derivatives break the price/risk mechanism they depend on for legitimacy, i.e., when the derivatives replace the underlying stock as the stock being traded.

I used to think that as our economy gained in size and diversification that the effect of crisis in a particular area on the whole economy would be greatly reduced. Boom/bust cycles are an economic reality no matter what we do to try and control them. Even core industries like steel and energy could benefit from diversity to some extent. Any particular sector could go through boom bust cycles without much meaning to the whole economy. Derivatives attempts to provide a safety net against bust cycles by spreading the bust cycle throughout the whole system. It therefore lets the bust cycle propagate on a grand scale undoing the safety net we get from economic diversity. It trades individual risk for systemic risk.

 

[my_wan]

<sniped>

I snipped the whole post for brevity but I wanted to note that I couldn't find a single point to take issue with in that post.

 

[DanishDynamite]

C'mon, now, lots of people were greedy and stupid, and that includes the Average Joe on the street. The housing market (like the .com boom before and the oil futures market afterwards) was driven by speculation. Real estate typically appreciates over time. If the appreciation is abnormally high, ask yourself why. If there's no "real" explanation like population growth or running out of land, then what is it?

If a home appreciates by 50% in two years due to speculation, then chances are that it's going to slide backwards at some point. Speculation has to end eventually. There were a number of loan packages that were excellent for speculation, but people started using them to buy homes after selling their current home. Now they are sitting in homes where they have very little invested and the loan amount is greater than selling price. Lots of people are just giving them back to the bank. Other people counted on future appreciation in order refinance in a way they could afford. Now they're screwed.

The banks were just as stupid for making too many of these loans. Multi-family buildings were also hit hard, but it was the same stupidity on both sides. If a building was going for $35K per door in 2004 and now they are selling at $80K per door, are they really *worth* that much? Not really. Are the rents going to go up accordingly? Maybe for a while, but they, too, will drop. Remember, the investors who didn't sell could still afford to undercut the recently purchased buildings.

In short, there was no reason for the bank not to make ridiculously unsound house loans.

What garbage!

As oon as the worth of a house rises above "real" income increase, even an idiot would know that a Bubble was occuring.

 

[my_wan]

In short, there was no reason for the bank not to make ridiculously unsound house loans.

What garbage!

As oon as the worth of a house rises above "real" income increase, even an idiot would know that a Bubble was occuring.

That is by no means what UncaYimmy stated. He quiet clearly stated, "The banks were just as stupid" and "it was the same stupidity on both sides". How this gets construed to mean, "there was no reason for the bank not to make ridiculously unsound house loans", is beyond me. I will give your "garbage" quote credit in that if he had meant what you interpreted it would in fact be garbage. As it turns out the "garbage" quote belongs elsewhere.

 

[Francesca R]

Are people "stupid" just because they fail to get out of a highly appreciating asset before it falls, or are they still stupid even if they find that "greater fool" to sell to in time?

Are they "smart" if they short the highly appreciating asset in anticipation of a rapid fall and they profit from that, and are they still smart if they short the appreciating asset but greater fools drive them into a loss (on which they choke) before they are able to profit from a later price fall?

In other words, are you (my wan) awarding the label "stupid" (and by implication "not stupid") purely on the basis of realised P&L?

 

[my_wan]

Are people "stupid" just because they fail to get out of a highly appreciating asset before it falls, or are they still stupid even if they find that "greater fool" to sell to in time?

Are they "smart" if they short the highly appreciating asset in anticipation of a rapid fall and they profit from that, and are they still smart if they short the appreciating asset but greater fools drive them into a loss (on which they choke) before they are able to profit from a later price fall?

In other words, are you (my wan) awarding the label "stupid" (and by implication "not stupid") purely on the basis of realised P&L?

Very reasonably question. Personally, except by proxy in defending UncaYimmy, I avoided the label "stupid". My only reference to the term prior to that was to say, "Stupidity is subjective". I didn't object to UncaYimmy's use of the term as it was used as a direct objection to DanishDynamite's assertion of, "I blame stupidity and greed". UncaYimmy's use was then merely a logical device to show that the term belonged equally, if at all, across all spectrums of people, including the "average Joe".

The speculators win, lose, or draw that was in it to try and time the short term market are not the relevant group under consideration here. Black–Scholes isn't designed to say anything about these tactics. Their successes and failures are independent of any long term viability of the stock. The relevant group that could arguably qualify for such a label is the institutional investors in it for the long term security Black–Scholes was designed for. This includes some 401k management, some banks, lots of life insurance policies, loan default insurance, etc. AIG got into financial trouble because they never considered the possibility that one loan default could have any effect on the odds of another default. If we accept the "stupid" label wrt the mortgage crisis at face value then even the Nobel Prize committee qualifies. Neither I nor UncaYimmy made in claims of the term being relevant in assigning blame. Me by avoiding the term, even the OP title says "nobodies fault", and UncaYimmy by using it as a rhetorical device to show lack of relevance.

 

[Francesca R]

Well I still can't really work out what this topic is about. Is it something to do with the belief in log-normal price changes? Persistently diversified mistakes? Excessive leverage? What? Thanks

 

[Uncayimmy]

Thanks to My_Wan for stepping in for me as needed. You're right, I used the term "stupid" because DanishDynamite chose to use it. I don't think it's the right word, but whatever it is, it was spread around pretty evenly.

I'm not an economist, so I'm sure I will miss some minor and probably major points. However, I'm gonna take a stab at it. If I understand My_Wan's point, it goes something like this

• Average Joe figures the bank won't make him a loan that's a bad risk (I hear this all the time).
• The mortgage officer figures underwriting won't make a bad risk loan.
• Underwriters figure their guidelines won't let them make a bad risk loan.
• The folks writing the guidelines know there is risk, but work to make it merely a calculated risk.
• The people selling the loans figure that ultimately the market will determine what's bad risk or not. If they can sell the loans, they must be okay.

The market, however, is not seeing individual loans. The risky paper is bundled with the good paper. The bundles began determining the value of the individual loans rather than vice-versa. It's not immediately apparent that there's a problem somewhere. When the problems do creep up, the banks have to change their guidelines. This works its way back upstream.

It now becomes harder to buy property because the financing is tougher to get. This means less demand for any given property. Less demand means lower prices.

When the selling prices go down, one thing that happens is that people can't refinance like they expected and needed to. This causes them to default. The default moves downstream to all the bundled mortgages and makes them worth less than before. This in turn comes back upstream in the form of tougher lending requirements. This in turn reduces the amount of credit available. This lowers demand. This lowers prices even more.

You end up with another kind of foreclosure: People who put very little down on their homes. The loan balance exceeds the selling price of the home. Since they have very little invested, they don't want to make payments on a $400K home that is valued now at $320K. It's not that they can't afford, they just prefer not to, so they give it back to the bank (let it foreclose or do a short sale). If they had put down $80K, they would probably still be making payments to protect that investment.

These two general types of foreclosures result in more homes for sale. So, while at the same time we've decreased the buyer pool due to credit we have *increased* the number of homes for sale.

There are lots of other factors at play, but in my mind they can be left out for now.

So, where did things go wrong, so to speak? The problem was in the market for the mortgages. Since they were bundled up, it was harder to see the problems. The bundles then began driving the price of the individual papers rather than the other way around. This allowed more of these risky loans to be made before the system started regulating itself. By then the bubble was too big.

Then again, *every* single entity involved had the opportunity evaluate the risks. Nobody forced anybody to place offers higher than the asking price the morning the house went on the market and *before* even seeing it. Nobody told people to sell their homes, spend the equity on vacations, and buy a more expensive home with very little down. Nobody made anybody gamble on their primary home hoping that it would appreciate enough so they could afford it.

Nobody forced the banks to think in six-month snapshots in order to set the value of a property. Nobody told them they weren't allowed to reassess their risk guidelines, which were based on a stable market, not a bubble. And nobody told investors that these loan packages were risk free and that they could assume everything was hunky dory.

In and of themselves sub-prime loans were not the problem. Speculating is not itself a problem. Using your equity instead of putting it into your next home is not itself a problem. The problem is balance. The market didn't correct itself in a timely fashion.

So, we're back to the subject: the crash was nobody's fault (or everybody's fault).

 

[my_wan]

Again UncaYimmy has posted a reasonably valid caricature of the situation even if the details may vary a bit. My main argument is that trading derivatives rather than the underlying stock breaks the ability of the market to correct itself in a timely fashion. The value of the derivatives was designed to be set by the underlying stock value, not the other way around. The derivatives simply don't contain the same feedback information needed for timely market corrections because increases in risk gets averaged out making them essentially invisible in the short term. Also hidden by these derivatives is which practices created what level of risk. UncaYimmy was correct in saying the problem was market balance. At the market level its the balance between value and risk. The Black–Scholes valuation method depends on a nearly perfect relationship between value and risk for the valuation method to have legitimacy and reduce the institutional risk through averaging the bad loans. Yet the averaging breaks the ability of the market to track the changes in the risk/value ratio in a timely manner or even the specific source of the changes in risk.

 

[Uncayimmy]

I created a caricature? I didn't even know I was an artist! Seriously, though, I think that's a good description of what I wrote. It's more complicated than I described or even understand.

 

[Francesca R]

[ . . . ] So, we're back to the subject: the crash was nobody's fault (or everybody's fault).

Well, "everybody's fault" sounds more like it to me. And when everybody makes a mistake in the same direction (positively correlated) then the effects can be too adverse for everyone involved to bear, which means that the cost explodes externally, and if there is an external authority it has little choice but to come to the rescue. It then has a legitimate incentive to re-rig incentives so that a repeat occurrence is a lot less likely. Although as history records, excessive correlated leverage seems to have a way of manifesting somewhere new, eventually.

I don't know that the Black-Scholes forumla has much to do with this. Bubbles and busts predate it by a few centuries. It is not within governments' powers to dictate what risk assessments participants make, but it is within their power to impose its own in the form of restrictions of leverage, in the public interest (the public has a legitimate interest in not being adversely affected by unrelated private decisions working out badly for those deciders)

 

[Francesca R]

My main argument is that trading derivatives rather than the underlying stock breaks the ability of the market to correct itself in a timely fashion.

I don't see why. In any case, markets have the ability to be "incorrect" regardless of complex derivatives. Plenty of auctions of (unleveraged) claims attest to that.

The value of the derivatives was designed to be set by the underlying stock value, not the other way around.

Both of a derivatives price and an underlying security price are set by market supply and demand. What you might mean is that if the open interest in one of these is much larger than it is in the other, then it is not possible (for everybody) to arbitrage between the two of them in a panic.

The derivatives simply don't contain the same feedback information needed for timely market corrections because increases in risk gets averaged out making them essentially invisible in the short term.

I don't see what is being "hidden" in respect of market price risk. There are several things that are not, and never were embedded in the Black-Scholes equation, such as the third and fourth moments of variation (skewness, kurtosis). There is also the observed reality that market prices are not fully explainable by any well-known parametric function (and neither can they be fitted to a true scale-invariant power law function, although that does contain an enlightening model of "correlated mistakes"). These things are often neglected and/or not understood, but they are not hidden. They are overlooked at the user's peril, but competitive pressures incentivise such behaviour, as can moral hazard.

 

[my_wan]

I don't see why. In any case, markets have the ability to be "incorrect" regardless of complex derivatives. Plenty of auctions of (unleveraged) claims attest to that.

The reason why is because in all cases where you average groups together you give up information about individual members of that group. Consider 20 bags of marbles mixed together and a count of the broken marbles is 5% of the total. If 100% of the broken marbles came from bag 5 you can no longer determine that fact from the average. They are now mixed in a single bag containing all 20 bags of marbles. Without the mixing and averaging of your marbles you may have learned that you could have avoided broken marbles simply by avoiding marbles from company X. Since company X is now just as successful at selling you cheap worthless marbles company Y and Z must now borrow from company Xs practices of selling cheap marbles to compete. How many broken marbles will you tolerate before you quit buying any marbles at all? So yes, you can be incorrect in the initial value you paid for the marbles from company X. Only through derivatives will you continue buying from company X thus propagating the practice of selling broken marbles through the other companies. It can just as easily be the model number of the marbles as it is which company they came from, like the credit worthiness and terms of the mortgage in question.

Yes markets often do massive corrections of (unleveraged) claims but only in leveraged claims must the corrections unduly extend across otherwise healthy sectors of the market. This is because the derivative itself cannot distinguish between the parts needing correction and the healthy parts simply averaged in.

Both of a derivatives price and an underlying security price are set by market supply and demand. What you might mean is that if the open interest in one of these is much larger than it is in the other, then it is not possible (for everybody) to arbitrage between the two of them in a panic.

True. However, like the broken marbles, price is set by market supply and demand. Demand for 95% good marbles is certainly higher than demand for 100% broken marbles. Derivatives allow credit J and/or terms K that produce well above 5% broken marbles to trade at the value of only 5% broken. No that is not what I mean. Arbitrage limits are the same whether it is derivatives or not. Arbitrage is possible in both cases under normal trading and not possible in both cases in a freefall sell off. What I'm talking about is the information lost in the averaging of derivatives.

I don't see what is being "hidden" in respect of market price risk. There are several things that are not, and never were embedded in the Black-Scholes equation, such as the third and fourth moments of variation (skewness, kurtosis). There is also the observed reality that market prices are not fully explainable by any well-known parametric function (and neither can they be fitted to a true scale-invariant power law function, although that does contain an enlightening model of "correlated mistakes"). These things are often neglected and/or not understood, but they are not hidden. They are overlooked at the user's peril, but competitive pressures incentivise such behaviour, as can moral hazard.

What is being hidden is the source of the risk. Like the 20 bags of marbles the derivative must simply assume that the broken marbles is systemic of all bags of marbles. In fact the vast majority were the result of credit J and/or terms K of a small number of loan practices that couldn't be tracked by the derivative valuations. You can rightly say they were not hidden because those bad marbles showed in the 5% broken rate. Except in cases were introductory periods were followed by draconian payments, which was hidden by flipping the house prior to defaulting. However, in order for a mortgage broker to compete on equal grounds they must adjust credit J and/or terms K more in line with that 5% or be driven out of business by the competition. It is not the bad marbles that was hidden, it was the source of risk defined by credit J and/or terms K. Market forces then dictate that this 5% must increase until nobody can sell marbles anymore without taking a loss.

The mortgage turnover rate and easy credit allowed the system to play hot potato with the risky mortgages where the property was flipped prior to the mortgage going bad. This allowed a 45% broken marble rate to show only 5%. Ever watched the TV shaw called 'Flip This House' on A&E? Homeowners were using the same loan terms as these speculators to buy more house than they could afford and flipping them a year later to avoid defaulting the loan. If your a mortgage broker that says no to this you don't stay in the mortgage business.

 

[mhaze]

The reason why is because in all cases where you average groups together you give up information about individual members of that group. ....

Not intending a derail, but I would like to get ahold of scanned copies of some of these derivatives and credit swapagreements which are the facts at the basis of the discussion.

Anyone know where/how they could be had?

 

[Francesca R]

I would like to get ahold of scanned copies of some of these derivatives and credit swapagreements which are the facts at the basis of the discussion.

Anyone know where/how they could be had?

Credit default swaps are traded between institutional market participants and normally executed under the undertakings of an ISDA Master Agreement (1992 or 2002), that would already be in existence and signed by the two counterparties to the swap. (ISDA = International Swaps and Derivatives Association, which is not a regulatory body but a trade organisation that exists to promote "best practice", and the industry)

See here, and here for CDS supplements. (You have to buy the relevant literature and it is not brief. This may affect your desire to research it )

An individual swap contract executed under an ISDA is not something I can find a template of on the net, but is a statement of the terms of what each party pays and receives. Usually one of those is LIBOR plus/minus a spread and the other is the return of, well, anything pretty much.