Monday, Feb 18, 2008
Great article simply describing my favourite topic
NYTimes: Arcane Market Is Next to Face Big Credit Test
Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companies’ finances. Like a homeowner’s policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.
As with other securities that trade privately and by appointment, assigning values to credit default swaps is highly subjective. So some on Wall Street wonder how much of the paper gains generated in these instruments by firms and hedge funds last year will turn out to be illusory when they try to cash them in.
“The insurance business is very difficult to quantify risk in,” said Mr. Farrell of Annaly Capital Management.
3 Comments
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1. lvmreader said...
Exchange traded CDS would be just dandy!
2. cornishman said...
Anyone know how long term these 'insurance policies' are. If they are only one year at a time, presumably if the game can be kept going for a few more months, the 'insurances' will all have been reset before the present inadequacies come to light?
3. lvmreader said...
They are typically 5 years (most common) but can be any duration from a few months to 30 years.
They trigger when a credit event happens. They are bought and sold through the lifetime of the policy.