Comments on: The Devil in the (Derivative) Details: AIG, Fortis

By: Elimo

Elimo — Sat, 04 Oct 2008 11:32:00 +0000

Basle II banking book credit risk might not allow the kind of ‘AIG’ wrap on super senior tranches but the trading book market risk internal model approach allows such offsets. No wonder BIS has proposed a sizable increase in trading book market risk internal model charge – to include a very big piece called ‘incremental risk’ as proposed on 22 Jul.

By: Kady

Kady — Fri, 03 Oct 2008 20:58:00 +0000

That’s a shocking write-down. Are any American firms writing down their CDOs similarly?

By: wintermute

wintermute — Fri, 03 Oct 2008 16:20:00 +0000

I recall reading that Goldman Sachs was lumbered with a $65bn LBO portfolio. Wonder how that will do on rollover dates next year…

By: eh

eh — Fri, 03 Oct 2008 16:19:00 +0000

…for the purpose of providing them with regulatory capital relief rather than risk mitigation.

What is the reason for such arrangements other than to boost profits in a very, very risky way? And then these banks have the nerve to ask for, and in some cases to more or less expect, government/taxpayer help. I wonder how many members of Congress — who are about to vote/cave on the bailout — are even remotely aware of issues like this? Versus just responding to market blackmail — it’s either a bailout or a depression — and the whining of Paulson, Bernanke, et al.

By: rmlnyc8

rmlnyc8 — Fri, 03 Oct 2008 16:17:00 +0000

That is precisely the problem. CDOs, like all securitizations, should contain homogeneous assets.

By: Namazu

Namazu — Fri, 03 Oct 2008 15:39:00 +0000

I don’t see how anyone can argue with ‘mark to 22′ on definitional grounds at least. Le compte est bon!

By: Brandon

Brandon — Fri, 03 Oct 2008 15:07:00 +0000

Saw a funny posting regarding AIG and what a fiasco that situation turned out to be. http://www.gotoguy.com/?p=325 says it how it is.

By: m

Fri, 03 Oct 2008 14:56:00 +0000

I read “written down to 25%” to mean written down to 25 cents on the dollar.

So on average all CDO’s are written down to 22 cents on the dollar, i.e. they lose 78% of their book value.

By: Anonymous

Anonymous — Fri, 03 Oct 2008 14:22:00 +0000

I suspect the CDS buying was at least partially defensive. On the face of it Basel II is designed to allow dodgy banks to choose their own capital and for the regulators to say "nothing to do with me, guv" when it all blows up. The most judgemental of the three Basell II calculation strategies basically says "rate the risk however you want but document the assumptions".

HOWEVER, there's a requirement that this recalculation (for Foundation and Advanced approaches) can't be less than a capital floor of 95%, 90% and 80% of the prior year for 2007, 2008 and 2009 respectively (according to FSA website).

I read that to mean BASEL II can't be used to slash minimum capital in a hurry, and thus the CDS buying was to avoid allocating MORE capital rather than pro-actively hold LESS.

Nick

By: ruetheday

ruetheday — Fri, 03 Oct 2008 14:07:00 +0000

I’m not real familiar with the Basel II details, but it seems to me that buying a bunch of risky assets and then getting CDS insurance on them to meet risk weighted capital requirements exposes a serious flaw in the regulatory regime – it allows you to trade direct credit risk for counterparty risk.