CDS - Credit Default Swaps

  • Known in the trade as credit default swaps, the derivative contracts serve essentially as insurance against default on corporate loans and bonds.

2001 0402 - InvestmentNews - Default swaps could imperil insurers: A new derivative that Wall Street investment houses are peddling to insurance companies – promising fat profits - ... - By Michael Fritz - [link]

  • 2008 0618 - NYT - MBIA debt is setting up standoff with regulators, By Gretchen Morgenson and Vikas Bajaj - [link]
    • The risks associated with the vast, unregulated market for credit default swaps played a crucial role in the bailout of Bear Stearns.
    • Now these financial instruments are taking center stage in another Wall Street drama:
      • whether regulators will let MBIA, the big bond insurance company, renege on a promise to shore up a crucial unit with $900 million in capital.
  • 2005 1107 - STATEMENT ON CREDIT DEFAULTS SWAPS PROVIDED IN RESPONSE TO IRS NOTICE 2004-52 - NOVEMBER 7, 2005 Re: Statement on Credit Default Swaps Provided in Response to IRS Notice 2004-52 - nysscpa.org/- 20p
  • 2022 - FRB - Credit Default Swaps, by Antulio N. Bomfim - 27p
  • Sample Replication Filing #2 - Example of Replication (Synthetic Asset) - Transaction Documentation
    • 1) The $500 cash outflow noted in year three represents the loss as defined in the swap agreement.
      • This could be a function of stipulated market valuations, or tied to an index of recovery values (e.g., S&P).  (p470)

1998-1, NAIC Proceedings - Valuation of Securities (EX4) Task Force

  • The working group received an update regarding credit derivatives and noted that a synthetic exposure that included a credit default swap could bring about more risk to the investor than the cash market equivalent due to the default event definition in the default swap. (p343)

--  10. Report of the Valuation of Securities Task Force 

2001-1, NAIC Proceedings

  • 5. Replication Transactions
    • Mr. Evangel read a report on these transactions prepared by Mr. Driscoll.
    • Mr. Gorski asked the SVO staff to expand the report to include a more detailed discussion on the nature of credit default swaps and the counterparties involved in them.  (p841)

--   Valuation of Securities (EX4) Task Force

2002-1, NAIC Proceedings

  • 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]

  • (p30) - 12 New York State Insurance Dept., Recognizing Progress By Federal Government In Developing Oversight Framework For Credit Default Swaps, New York Will Stay Plan To Regulate Some Credit Default Swaps, press release, November 20, 2008 (‘‘Dinallo announced that New York had determined that some credit default swaps were subject to regulation under state insurance law and that the New York State Insurance Department would begin to regulate them on January 1, 2009.’’).
  • (p30) - 13 New York State Insurance Dept., Recognizing Progress By Federal Government In Developing Oversight Framework For Credit Default Swaps, New York Will Stay Plan To Regulate Some Credit Default Swaps, press release, November 20, 2008 (Superintendent Dinallo stating ‘‘I am pleased to see that our strong stand has encouraged the industry and the Federal Government to begin developing comprehensive solutions. Accordingly, we will delay indefinitely regulating part of the market.’’) 

2009 0204 and 0205 - GOV (House) - Hearings to Review Derivatives Legislation - [PDF-300p, VIDEO-?]

  • Does Reinsurance + Side Letters = CDS?
    • One of the most widespread means of risk shifting is reinsurance, the act of paying an insurer to offset the risk on the books of a second insurer.
    • This may sound pretty routine and plain vanilla, but what most people don’t know is that often times when insurers would write reinsurance contracts with one another, they would enter into “side letters” whereby the parties would agree that the reinsurance contract was essentially a canard, a form of window dressing to make a company, bank or another insurer look better on paper, but where the seller of protection had no intention of ever paying out on the contract.

2009 0402 - ritholtz.com - AIG: Before CDS, There Was Reinsurance - [link]

2009 0402 - ritholtz.com - AIG: Before CDS, There Was Reinsurance (Part 2) - [link]