5 ms·

The credit event auction means that you can't just get someone to write a CDS, create a default, and collect money. If everything is trading at par then the auc

by vostok 9y ago

The credit event auction means that you can't just get someone to write a CDS, create a default, and collect money. If everything is trading at par then the auction will be at 100 and you'll get nothing. The trick here is that they have bonds that are trading way below par. Honestly this seems like a story about someone falling asleep at the wheel.

whatok 9y ago
Below link has a primer on auctions as well as results: http://www.creditfixings.com/CreditEventAuctions/fixings.jsp http://www.creditfixings.com/CreditEventAuctions/fixings.jsp
jessaustin 9y ago
Is the implication that Goldman should have bought up those bonds until the price was higher, to protect their position? Do other sellers of these securities do the same? In that case, this would seem to be yet another example of Goldman seeking profit outside the game of finance. It worked for them in 2008...
- vostok 9y ago
  It means that the level where they trade the CDS should account for this. TBAs are another good example where this stuff is important.
  - kchoudhu 9y ago
    As in passthrough TBAs? How so?
    - vostok 9y ago
      It's literally the same effect. The exact security isn't specified so you're going to get the "worst" one that is eligible. If you misjudge how bad the "worst" security is then you'll get screwed. Similarly, these CDS don't specify the exact security so you need to think about the worst case. The major difference is that the auction only happens if there is a credit event. Maybe here's an easy non-financial way to think about it. Suppose we sign a contract that says that I need to delivery 1 ton of at least 90% gold to you. When you price the contract, you probably shouldn't assume that I'll deliver 99% gold.
      - kchoudhu 9y ago
        Ah, yes. Lots of stories about contras calling up and thanking you for letting good stuff out the door on A-day. Mistakes like this happened -all- the time at both the banks I worked at.

by vostok 9y ago

whatok 9y ago

Below link has a primer on auctions as well as results: http://www.creditfixings.com/CreditEventAuctions/fixings.jsp http://www.creditfixings.com/CreditEventAuctions/fixings.jsp

jessaustin 9y ago

Is the implication that Goldman should have bought up those bonds until the price was higher, to protect their position? Do other sellers of these securities do the same? In that case, this would seem to be yet another example of Goldman seeking profit outside the game of finance. It worked for them in 2008...

vostok 9y ago
It means that the level where they trade the CDS should account for this. TBAs are another good example where this stuff is important.
- kchoudhu 9y ago
  As in passthrough TBAs? How so?
  - vostok 9y ago
    It's literally the same effect. The exact security isn't specified so you're going to get the "worst" one that is eligible. If you misjudge how bad the "worst" security is then you'll get screwed. Similarly, these CDS don't specify the exact security so you need to think about the worst case. The major difference is that the auction only happens if there is a credit event. Maybe here's an easy non-financial way to think about it. Suppose we sign a contract that says that I need to delivery 1 ton of at least 90% gold to you. When you price the contract, you probably shouldn't assume that I'll deliver 99% gold.
    - kchoudhu 9y ago
      Ah, yes. Lots of stories about contras calling up and thanking you for letting good stuff out the door on A-day. Mistakes like this happened -all- the time at both the banks I worked at.