PrefBlog

More trader games in the CDS market – and now the rules might change:

At issue in the Amherst trades is whether sellers of protection on mortgage bonds can purchase loans underlying the debt at above-market prices to prevent a default that would trigger payments to buyers of the contracts. Credit-default swaps pay the buyer if the securities aren’t repaid as expected.

The call of the securities at their face value of $29 million, the amount remaining in the 2005 subprime-mortgage bond issue, caused the banks to lose money. Bankers on the American Securitization Forum call probably couldn’t ban the strategy for existing trades, the people said.

Proposals included creating agreements for new swaps that would force sellers to disclose whether they have the right to call the securities, and “best practices” guidelines to say such trades shouldn’t be executed, they said.

$29-million? Banks are prepared to admit that their traders lost a lot of money in a $29-million market?

They haven’t learned a damn thing, have they? Giving a block of capital to some kid with an MBA but not enough brains to realize you don’t play in a rigged market – or one that’s small enough to rig. $29-million? That’s not even a big ticket.

What does buying CDS protection mean, anyway? It’s nothing more nor less than shorting a bond. What kind of moron shorts into a $29-million market? What kind of useless twerp is the moron’s supervisor?

Let’s not have any more rules. Let’s just see a few bozos get fired. Or, at least, eating their losses like big boys and learning from the experience. As I have stressed many times on this blog, debt decoupling can result in strange things happening … particularly in a rinky dink $29-million market.

The Federal Reserve Bank of Boston has released a working paper by Todd Prono that looks interesting, but which I don’t have time to read now. So, without comment, here’s the abstract:

A pricing restriction is developed to test the validity of the CAPM conditional on a prior belief about the correlation between the true market return and the proxy return used in the test. Distinguishing this pricing restriction from competing tests also based upon the relative efficiency of the proxy return is a consideration for the proxy’s mismeasurement of the market return. Failure to account for this mismeasurement biases tests of the CAPM towards rejection by overstating the inefficiency of the proxy. A time-varying version of this pricing restriction links mismeasurement of the market return to time-variation in beta

Pretty much a nothing day in the major sectors of the market, but volume continued heavy and Floating Rate issues continued to shine.

This entry was posted on Friday, June 12th, 2009 at 10:59 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.