cheers

yes exaclty i'm just trying to show in indeterminability of the problem. consider the contradictions in your statment !

either there exist mathematical methods of determining default or the math is not a 'solution' the two cannot both be true.

Math cannot be a perfect solution. In order to use particular mathematic method you need to determine which method fits to present/predicted market conditions. Mess appears when those conditions change - i.e, when instead max 2% of borrowers got insolvent it is 5%.
Big banks and hedge funds did mistake here - they probably assumed that "New Era of No-Ending Low Interest Rates and Low Defaults" came.

yes math can only be an imperfect solution. mathmaticians always seem to assume too much... makes an ASS out of U and ME.

There are indeed mathematical methods to determine probability of default

Simple

http://www.noelwatson.com/blog/PermaLink,g...79327afb93.aspx

Emulating Bloomberg CDSW

http://www.noelwatson.com/blog/PermaLink,g...7c6850405f.aspx

.................................................

The article was talking about correlation over 100%, not probability of default

http://www.noelwatson.com/blog/PermaLink,g...dc3e46801f.aspx

Gaussian implementation here (I need to fix at least one thing)

http://www.noelwatson.com/blog/PermaLink,g...e9b697ce1c.aspx

Sorry I couldn't resist!

but this is totally recursive. you are estimating the default risk based on someone elses estimate of the default risk and recovery rate, surely thats dangerous ? and where did you pluck recovery rate from ? have you run simulations of likely prices in liquidations of assets and performed comprhensive analysis of liabilities ?

so if i quote you a different CDS price I can alter your probability of default. and how do you know I have performed detailed analysis of the recovery rate to come to my spread price ? how do you know I didn't just make the spread up ?

Its crazy, its not maths... Its an entirely self referential system, it cannot claim to calculate or even estimate default risk IMHO.

Recovery rates are assumed to be 40% for senior and 20% for subordinated. Appreciate that actual values do vary dependent on where we are in the economic cycle and what sector the entity is in. It is a risk you take that the recovery rate is not what you are anticipating for an individual default (not that there have been many up to now) but I would argue that it will average out over time.

If you are are net zero notional on a name why does it matter what the recovery is (ignoring counterparty risk)

If you quote me a spread that is not the best in market why would I buy protection from you? It is a liquid market with several dealers buying/selling protection

theres that assumed word again maybe its just me but 40% is a huge assumption.

you cannot hope to use an average and get a reliable outcome!

the illusion of liqudity is a market makers primary tool in acting as a middleman, generally there will be a Primary market maker who sets the price and the rest competative market makers who just add a bit to the illusion of liquidity. I refered to myself but I was just showing you what the market maker is telling you

Its primarily an assumption that the market maker knows what he is talking about... e.g an assumption that the market is efficent. but the market is likely not efficent could well be pricing the contracts in a distorted way e.g http://en.wikipedia.org/wiki/Bandwagon_effect

I think that your faith in the market price of the CDS as expressing an actual probability is a bias http://en.wikipedia.org/wiki/Focusing_effect
so basically you just assume everything and if you find out the inputs are wrong you will just adjust your assumptions according to a http://en.wikipedia.org/wiki/Texas_sharpshooter_fallacy

Dollar chart for 12/03/08 - Chart

Bucky going down,

and flight to safety
http://finance.yahoo.com/q?s=%5ETNX


And oil at USD 110 nearly.

Is something going on? We should be told.

I urge you all to protect yourselves NOW.

http://business.timesonline.co.uk/tol/busi...icle3542775.ece
March 13, 2008
Despite the Federal Reserve's efforts Wall Street fears a big US bank is in trouble

Global stock markets may have cheered the US Federal Reserve yesterday, but on Wall Street the Fed's unprecedented move to pump $280 billion (£140 billion) into global markets was seen as a sure sign that at least one financial institution was struggling to survive.

The name on most people's lips was Bear Stearns. Although the Fed billed the co-ordinated rescue as a way of improving liquidity across financial markets, economists and analysts said that the decision appeared to be driven by an urgent need to stave off the collapse of an American bank.

A chain reaction of cascading defaults gathering speed exponentially. This is the mark of the derivative beast.

http://business.timesonline.co.uk/tol/busi...icle3542723.ece
March 13, 2008
Hedge funds on the brink as US Federal Reserve cash fails to ease crisis

Several hedge funds with assets of more than $4 billion (£2 billion) were on the brink of collapse last night or had halted withdrawals, despite moves by the US Federal Reserve this week to ease America’s deteriorating credit crisis with a $200 billion collateral lending facility.

The potential closure of six funds came as a leading private equity executive, who declined to be named, said that such funds were “snapping like twigs”, with one failing every day.

Yesterday Patti Cook, Freddie Mac’s chief business officer, predicted that the Federal Reserve’s $200 billion bond lending facility this week would fail to solve the long-term problem of Wall Street’s deepening credit crisis.

The funds’ predicament – seven funds have been frozen this month – was seen as evidence that the initiative by America’s central bank to allow lenders to swap their risky mortgage-backed bonds for safer Treasury debt, will be of help only in the short term. Those fears hit the dollar and New York equity markets, with the greenback falling to a new low against the euro and sterling, as the European currency hit $1.55 for the first time.

These are retail, NOT hedge funds.

What are you waiting for?

http://www.stuff.co.nz/4436869a13.html
ING funds freeze hits 8000 investors
Thursday, 13 March 2008

The global financial crisis has reached out to bind the hands of 8000 investors with New Zealand's biggest retail fund manager.

ING New Zealand has frozen withdrawals from two of its funds - a diversified yield fund and the regular income fund - in which more than $520 million has been invested.

ING's website said the value of the regular income fund fell 25 per cent in the year to last month and the diversified yield fund sank 22 per cent. The two funds were among 18 on the web page.

The New Zealand arm of the Dutch financial group manages about $8.7 billion in funds.

The two funds are invested largely in credit securities, which have been hit by the subprime market problems and falling United States house values.

ING's decision comes after 400 investors, worried about the credit crisis to which the funds are exposed, asked to withdraw their money this month.

More than a dozen New Zealand finance companies have failed in the last two years, although the reasons for the failures are diverse.

ING New Zealand chief executive Marc Lieberman said the fund trustee had suspended withdrawals from yesterday to protect the interests of investors.

Lieberman said investors would continue to receive cash distributions from the funds.

Please repeat what it is that I must do to protect myself, CG. I have been in Gold since 2004 but that is all. What other steps do you recommend?

jonpo,

Take a typical flow desk with 400 names. Assume a default rate of 0.5% (mostly high grade). If you do the maths on how much the desk as will lose/gain if one name defaults and has a recovery of 30% rather than 40%, it is secondary compared to the gains/losses on the MTM for his positions and the coupons. As I said, 40% approximation has been used for a reason (rough average for senior unsecured over time and sectors), so over a period of time I would expect the few defaults that occur to average this.

The indices are currently most liquid, so people tend to buy/sell this rather than the underlying single names. Looking at the ITRAXX Europe it is pricing in massive defaults over the next few years. The single names get dragged wider to remove the arbitrage between single names and the index. The reason I mention all this is that I agree with you saying the market isn't necessarily efficient (I learnt this during the tech boom), it may be technical factors (CPDO unwinds etc) pushing the market wider.

Agree that the market maker doesn't need to know what he is doing - he is making money off the spread so as long as he stays within his notional limits per name/tier/tenor he is happy.

Anyway, main act can be close. I am not economist, just written my M.A final work in psychology. However, some knowledge from social psychology and historical analogies tells me that if one of major banks will implode or be officially bailed out, it will trigger massive panic. Now human factor is the most important, not computers or math algoritms. Major bearish event will cause a panic, which will enlarge problems, which will enlarge panic...in present era of electornic media news will widespread even qiucker, panic will be more deep. It will look like nuclear explosion.

I would tend to agree that if a big investment bank goes, it will get interesting

From Bloomberg:

``Sentiment for the dollar continues to deteriorate very, very rapidly and if we're not careful this will turn into a dollar crash,'' said Mitul Kotecha, head of foreign-exchange research in London at Calyon, the securities unit of Credit Agricole SA, France's second-biggest bank. ``The risk is that we see a fairly aggressive move sharply lower towards 95 yen, and that could really perk up the interest of the Bank of Japan.''

Dare I say, CGNAO may be 100% correct

The credit crunch is heating up now that the Hedge Funds are pop-corning

Have you liquidated ALL financial assets except gold/silver bullion and Swiss Franc banknotes? Do you have some immediately available at hand, and is your passport ready?

http://business.timesonline.co.uk/tol/busi...icle3542749.ece
March 13, 2008
Alistair Darling ignores the looming collapse of financial institutions
Patrick Hosking: Business commentary

Alistair Darling's footling initiatives yesterday were a sideshow. There is one overwhelming challenge facing the business world and it is not going to be addressed by £10 million more for science teachers or £12 million for women entrepreneurs.

Western capitalism is, bluntly, being haunted by the spectre of a catastrophic domino-like collapse of financial institutions, one that if not prevented would without question lead to an economic ice age.

Mr Darling did at least acknowledge that a number of credit markets were “barely functioning” but then moved on to more trifling matters. Outside Westminster, however, fears remain that a major financial institution is close to collapse, or that policymakers at least believe it could be. Nothing else explains Tuesday's co-ordinated campaign by central banks and their increasingly desperate measures to pump more liquidity into a system showing fresh signs of paralysis. As one senior City figure put it yesterday: “There's the smell of death all right but no one can locate the corpse.”

En masse, the world is de-leveraging. On an individual level, moves by banks to call in debt and tighten loan conditions make perfect sense. Collectively, they could be devastating. Asset fire sales lead to falling prices which lead to shrinking collateral values and the need for more fire sales. It would not take all that much to tip the credit markets from the current state of paralysis (bad) to panic (much worse).

The toolkit of policymakers is looking depleted. They have tried liquidity injections; they have tried loosening their collateral terms; they have tried interest rate cuts. The next step in the US could be the outright purchase of mortgage books. That comes close to nationalisation.

Regulators are faced with scary choices. One false step could precipitate an unthinkable chain reaction of banking failures. Systemic failure is an outcome that must be anticipated and prevented at any cost. The temptation is therefore to turn on the hosepipe and so raise all boats on a tidal wave of liquidity on the grounds that even the smallest collapse could lead to bigger and more serious casualties.

Banks can be allowed to fail without the roof caving in. We have learnt that from Barings and from BCCI. But their demises were in the financial Stone Age - when contagion moved at a slower pace and banking relationships were more transparent and simpler. These days, a fiendishly complex cat's cradle of opaque derivative contracts links each bank to every other bank. The challenge to central banks as they survey this perilous landscape is to decide which banks cannot be allow- ed to fail under any circumstances - and which can and should.

EDIT typo

Passport? To where? And by what means of transport?

Lesbos. The bean-flick express.

Ain't got the Swissies

Q: Why is JPMorgan doing this?
A: Because they are Bear Stearns' derivative counterparty and are desperate to prevent the blow up of the entire mountain of OTC derivatives they hold.

Q: Will it work?
A: It's "contained"


http://money.cnn.com/2008/03/14/news/compa...dex.htm?cnn=yes
JPMorgan, NY Fed throw life line to Bear Stearns
Duo will provide financing to troubled bank for 28 days; Bear shares tumble on the news.
March 14, 2008: 9:38 AM EDT

NEW YORK (CNNMoney.com) -- JPMorgan Chase said Friday it will team up with the New York Federal Reserve bank to provide short-term financing to the battered Wall Street firm Bear Stearns.

Bear Stearns (BSC, Fortune 500) shares plunged nearly 10% on the news.

As part of the agreement, JPMorgan and the New York Fed said they would provide funding for an initial period for up to 28 days, with the Fed providing funding to JPMorgan through its discount window.

The news comes just days after Bear Stearns publicly denied market rumors that it was facing liquidity problems.

JPMorgan (JPM, Fortune 500) said it was working closely with Bear Stearns on securing permanent financing or other alternatives for the company.

The Wall Street firm added that it did not believe that the transaction would put its own shareholders at risk. Shares of JPMorgan sank nearly 2% on the news.

I notice bricks are up on the news.

consider a reference entity of Bear stearns

http://ftalphaville.ft.com/blog/2008/03/14...-soars-to-125m/

there are no offers in the market and its 1250 bp bid, offers basically at infinity so where is the mid price ? doesn't sound to liquid to me. im guessing though that the defaulting problem has essentially been solved for for the limited scenario of BSC. lol

Bear Stearns shares plummet as it seeks emergency funding
Andrew Clark in New York
guardian.co.uk
Friday March 14 2008

JP Morgan's aid is guaranteed by the Fed and will initially last for 28 days. In a statement, JP Morgan said it was working closely with Bear Stearns on securing permanent financing or "other alternatives for the company". This was widely interpreted as meaning that a takeover was a possibility.

The Fed has no statutory obligation to prop up Wall Street banks. But the central bank is understood to be nervous about the inter-linked nature of instruments such as credit default swaps which are traded between big financial institutions. Experts fear that the failure of one big bank could have a knock-on effect which reverberates around the financial system.

Would JP Morgan have the money to buy Bear Stearns if it wanted to?

BSC has a mkt cap of 4 billion US $
jp have mkt cap 80 +

so yes

In Breaking News on CNBC.com : Ratings Agencies Are Meeting To Consider Bear Stearns Credit Rating; Downgrade Possible Friday: WSJ


Gives one confidence that they know what's going on. right.

http://www.bloomberg.com/audioplayers/play.../radio_live.asx


Live link to Bear Stearns conference call if anyone is interested.

Carlyle Capital implosion widely cited as the straw that broke the Bear's back.

FTAlphaville give a list of typical creditors culled from the annual report and accounts...won't be 100% accurate by now, but does give a flavour.

http://ftalphaville.ft.com/blog/2008/03/14...creditor-banks/

"The immediate liquidity crisis at Bear Stearns has been closely entwined with the near collapse of Carlyle Capital Corporation.

Here, then, is a raw list of potential exposures to CCC. The author (and accuracy) is unclear, but it has been circulating trading desks in the City and on Wall St over the past 24 hours.

UPDATE - Turns out this list is culled from CCC’s annual report and is therefore out of date. Apologies - although we can now add one bank to this end-2007 list: Deutsche at $1.74bn.
-Citibank © $4.7B
-Lehman (LEH) $3B
-BoA (BAC) $2B
-UBS $1.8B
-Bear Stearns (BSC) $1.7B
-ING $1.5B
-JPMorgan (JPM) $1.4B
-Calyon $1.3B
-Merrill Lynch (MER) $760m
-BN Paribas $600m
-Credit Suisse $500m"

jonpo,

I don't have access to intraday U.S. data so I will have a look on Monday

This, from jsmineset.com -


We are watching the biggest panic in global financial markets that has occurred in my 65 years of life and 50 years of stock, bond and commodities investing.

It’s the Saint Patrick’s Day weekend and old Saint Patrick would probably be fascinated to see all the rich and worldly people running around in a panic.


Yesterday, JP Morgan and the U.S. Federal Reserve began a credit lifeline to Bear Stearns. This is a long and complicated story but I will attempt to summarize.

Bear Stearns had a run much like the bank runs of the late 19th and early 20th centuries. It had something to do with Bear Stearns itself but not as much as you would think if you were an average, fairly sophisticated citizen with some understanding of how the financial markets work.

I believe that most financial professionals may not completely understand what is happening. The lifeline and financing was done not to protect Bear Stearns alone but to protect the entire global banking system.

Bear Stearns is a PRIMARY DEALER IN U.S. GOVERNMENT BONDS. This is a very small and very important club. They have also been a leader in the business of prime brokerage and in the field of trade settlement and clearing - two very profitable mostly fee-based businesses that have been the envy of many other financial institutions. These have been their cash cows and very attractive businesses that have long been sought by other buyers.

Although Bear Stearns is quite large, it is the smallest of the top U.S. government bond dealers. So if someone wants to attack the system they will attack the smallest of the truly powerful bond houses. Bear Stearns, like all major mostly bond dealers and traders, also trades in mortgage bonds and derivatives and this is where its problems arose.

Bear Stearns' CEO said on Wednesday that the company was well capitalized and that its balance sheet is strong. I believe he was telling the truth. However, they are not immune to a run on the bank. IN FACT, NEITHER IS ANY OTHER MAJOR BANK OR INVESTMENT BANK IN THE ENTIRE WORLD.

BEAR STEARNS AS A PRIMARY DEALER CANNOT BE ALLOWED TO FAIL WITHOUT UNDERMIINING THE CONFIDENCE IN THE U.S. AND THE WORLD FINANCIAL SYSTEM.

BEAR STEARNS WAS PROTECTED FROM FAILING TO MEET ITS COMMITMENTS TO COUNTERPARTIES BECAUSE TO LET A PRIMARY DEALER FAIL WOULD MEAN A RUN ON EVERY MAJOR BANKING AND INVESTMENT BANKING INSTITUTION IN THE DEVELOPED WORLD. AND THAT WOULD ALMOST CERTAINLY LEAD TO A MASSIVE GLOBAL DEPRESSION. THIS IS MY CONSIDERED AND FIRM OPINION.

CONCLUSION

Events seem to be validating the opinion that Jim Sinclair and I have been propounding on these pages for a long time.

NO MAJOR U.S. BANKING INSTITUITON WILL BE ALLOWED TO FAIL TO MEET ITS COMMITMENTS TO DEPOSITORS AND COUNTERPARTIES. To do so would be an admission of defeat by the governmental agencies and institutions that exist to prevent events like these from happening including the Great Depression of the 1930’s.

CENTRAL BANKS EVERYWHERE HAVE NO OPTION BUT TO REFLATE AND SUPPLY LIQUIDITY TO THE WORLD FINANCIAL SYSTEM. FURTHERMORE, THEY HAVE BEEN DOING THAT SINCE THE CRISIS BECAME OBVIOUS ABOUT 6 MONTHS AGO.

All of the themes that I said had to be fulfilled to solve the problem are not yet finalized. But congress is working to create an agency to buy bad loans and the U.S. Federal Reserve has been doing it for months now.

Some countries have been slower than others to recognize the problem. But now all do and they will make haste with liquidity, government bail out programs for banks, bank nationalizations if necessary, government aid to mortgage holders and many other programs designed to get the problem behind us as soon as possible and to buy votes in the process.

WHAT LIES AHEAD?

THE SHORT ANSWER TO WHAT THE FUTURE HOLDS IS MORE INFLATION, HIGHER GOLD PRICES, HIGHER COMMODITY PRICES AND A LOT LOWER PRICES FOR BONDS.

will this work at all? my guess is it would delay the inevitable

Could someone PM me when America is availble for $1 in a firesale.

The numbers involved are mind boggling and stomach turning.... if it fails I hope the gold bugs are hedged

a couple more from tickerforum -

20 Canadian ABCP Trusts File Bankruptcy - HUGE!
http://www.tickerforum.org/cgi-ticker/akcs-www?post=34581

RUMOR - huge meeting going on concerning Bear Stearns
http://www.tickerforum.org/cgi-ticker/akcs-www?post=34585

It does appear “They are trying to save the system.... but they can't” - those words are becoming more profound by the day .


Anyone want to guess what happens next? How will they try and support the stock market, there has to be some form of announcement Monday??????

Will stocks rally again on the news? And where is the next body going to be found?

These are the questions that now matter. This goes way beyond astronomical house prices on a small island and what the website was originally set up for, but now it is far more serious than that. The financial system itself is in grave danger and I feel we need to share as much information as possible to make sure as a collective we minimise how much we are stung.

Edit - structure

From what I hear over here in the USA, a huge money printing exercise is about to get under way. Some seem to think, "inflate now" and worry about it later. First bailout all the Banks and Wall Street institutions. Then when they are safe , they will consider the $150 a barrel oil, $1,500 an oz gold, grain at levels leaving people in the third world priced out of the food market etc. etc. Markets have failed. Inflating our way out of it is their only option. Yet deflation in assets is also underway. I challange anyone to predict what will happen in the next few weeks, let alone months . We are at sea with no rudder, and the navigator just went overboard. We are left with the cabin boy in charge. OH !:rolleyes: I mean President George W. Bush.

Bernanke is down to his last $400 billion.

yep, old cgnao has been very consistent at a level where he must be on the inside. all imho of course.

I think a 1% emergency cut might help though next week......untill the next month with the same problems.......then another emergency cut.......you get the picture.

The financial system IS broken. The numbers involved (& adjusted for the relevant difference in years) are apparently a lot worse than 1929.

They will cut down to 0% if they think they have to. No large institution will be permitted to go bust. Bernanke's helicopters are in the air and preparing for the mother of all drops.

But that won't save asset prices as that is largely driven by expectations of further falls (the opposite of the upside).

That means the cost per default will continue to rise and BANKruptcies and reduced lending capacity as capital is destroyed....adding to the vicious cycle of falling asset prices.

Meanwhile the credit created by a low interest rate policy continues to cause inflation in commodities and will have the opposite effect to that required....it will bear down on consumer demand as real spending power diminishes rather than a reflation.

I want my mummy.

and coupled with the energy crunch in China and South Africa is making it too expensive to produce certain metals in those countries the resultant fall in production feeds prices even higher, because demand is still high shifting global production of certain metals toward places where energy is cheaper.....

Talk is turning to a "Commodities Shock" to the US economy on top of the Housing bust and credit crunch. Oil/gas prices are still filtering into the system, the shock will be this summer when gas goes out of sight over here. To sum up: The USA Fed Government owes near 11 trillion dollars debt, the personal debt level is out of sight, Corporate debt is also out of sight, then we have falling house prices, falling stock valuations, a trillion dollar war, an aging population getting set to retire, banks on the edge of going under, dollar sinking in value, etc. etc.
Only bright spot is US manufacturing might take advantage of the falling dollar and cheaper labour and get going again. That's a small peg to hang your hat on when you consider all of the above neg. points

But to turn a profit you'll need to find a greater fool.

found this on Bloomberg too - it didn't look too good
http://www.bloomberg.com/apps/news?pid=206...&refer=home

This is desperation.

The time has run out and the ugly truth is out for all to see.

I hope I made a difference for those who heeded my warnings.

The Wall Street Journal
Sunday, March 16, 2008

Bear Stearns Cos. was closing in on a deal Sunday afternoon to sell itself to J.P. Morgan Chase & Co., as worries deepened that the financial crisis of confidence could spread if Bear failed to find a buyer by Monday morning.

People familiar with the discussions said all sides were pushing hard to complete an agreement before financial markets in Asia open for Monday trading.

"None of these things is done until they're done," Treasury Department spokeswoman Michele Davis said Sunday afternoon. "But I think everyone's expectation is some time in the early evening hopefully" the deal will be done.