AIGFP - CDS - Collateral / Reserves

  • Blankfein - FCIC Interview
  • Cassano  
  • Dinallo
  • ISDA
  • The segment of the CDS market that experienced large losses and the greatest difficulties involved CDS related to asset backed securities linked to the subprime real estate market.
    • Although the asset backed CDS market is a relatively small segment of the overall CDS market, large leveraged exposures in this segment magnified losses in the subprime real estate market.
    • The root causes of the problems experienced with this segment of the CDS market arose from a number of sources, including primarily:
      • ⇒ ... the failure of sellers of credit protection, most notably monoline insurance companies, to collateralize their commitments as is customary in the corporate CDS market;
      • ... an historic collapse in housing prices accompanied by soaring rates of mortgage delinquency and default;
      • ... and a market-wide failure to appreciate the scope of the risk represented by exposure to the subprime real estate sector.  (p251)

--  Submitted Statement of Citigroup

2008 1014 - GOV (Senate) - The Role of Financial Derivatives in the Current Financial Crisis, aka Hearing to Review the Role of Credit Derivatives in the U.S. Economy -  [PDF-135p,  VIDEO-CSPAN]

  • 2008 0228 - FT (Financial Times) - Markets assess the costs of a monoline meltdown, Gillian Tett - [link]
    • But the monoline issue has raised anxiety about whether other counterparties in the CDS world, such as hedge funds, will be able to honour their contracts if corporate defaults rise.
      • While the International Swaps and Derivatives Association, the main trade body, vehemently insists this risk should be offset by the fact that most trades are backed by collateral, levels of investor unease are nevertheless rising.
  • So from my point of view, a failsafe mechanism built into this process that said that we did have adequate liquidity reserves, because we were able to meet the collateral calls, that in the severe scenario that you're outlining, the contracts allowed you to assert rights that would then compel the counterparty to come back to the table--  (p188)

--  Joe Cassano, AIGFP

2010 0630 - FCIC - 2008 Financial Crisis and Derivatives, Day 1, AIG Executives - [PDF-376p, VIDEO-CSPAN]