This is what happens when regulatory reform is not immediately passed

This is what happens when regulatory reform on credit ratings, collateralized debt obligations, derivatives and innovative financial products is put on hold.

Wall Street thinks it's all fine and dandy to do the same damn thing all over again.

Big h/t to MTGM.

Wall Street repackages toxic debt:

In recent months investment banks have been repackaging old mortgage securities and offering to sell them as new products, a plan that's nearly identical to the complicated investment packages at the heart of the market's collapse.

Fitch Ratings Report - 80% of all derivatives concentrated at 5 companies

Remember those nuclear time bombs called derivatives, structured finance vehicles we've been writing about for months?

A new Fitch Agency report, 'Derivatives: A Closer Look at What New Disclosures in the U.S. Reveal (you must login, very obnoxious website!) show:

80% of the derivative assets and liabilities carried on the balance sheets of 100 companies reviewed by Fitch were held by five banks: JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley. Those five banks also account for more than 96% of the companies' exposure to credit derivatives.

Business as Usual - Citigroup Engaging in Risky Trading

Now that the Dow has reached 9,000 and the financial crisis declared over, it seems banks, just weeks ago causing the entire world to be a potential Economic Armageddon, are back to their usual tricks, as previously noted on EP.

In The Final Straw for Citi we have yet more details on high risk trading....:

ere’s the scoop on this latest bailout outrage: Citi is planning to commit at least an additional $1 billion in capital to a team of stock-focused proprietary traders, say people with knowledge of these strategies — a move seemingly at odds with Pandit’s earlier vow.

Finally, the Justice Department Investigating Credit Default Swaps

Bloomberg is reporting Credit-Default Swaps Probed by Justice Department:

The U.S. Justice Department is investigating the market for credit-default swaps, according to Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks.

“Markit has been informed of an investigation by the Department of Justice into the credit-derivatives and related markets,” spokeswoman Teresa Chick said yesterday in an e- mailed statement in response to questions from Bloomberg News. She declined to comment on the nature of the investigation. “We will work with the Department to provide any information requested of us.”

The antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter

More Events Regarding Derivatives

The headlines buried how AIG has more massive potential losses on their CDS portfolios.


According to AIG, the risk factor includes a super senior CDS portfolio with a net notional amount of $192.6 billion of AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries, collectively known as AIGFP, as of March 31, 2009. The portfolio represented derivatives written for financial institutions, principally in Europe, for the purpose of providing regulatory capital relief rather than for arbitrage purposes. The fair value of the derivative liability for these CDS transactions was $393 million at March 31, 2009.

From couples to copulas, David Li was an actuary!

You will recall David Li, the quant who devised the formula that "revolutionized" derivatives. I believe this post from Robert Oak was the last time he was discussed at EP.

Now, along comes this article recently published in FT. While it doesn't shed any new light on the formula, per se, it is a very interesting biographical piece about young Mr. Li. It also retraces key developments in the creation and the ascendancy of quantitative analysis on Wall Street.

AIG Ignores New Derivatives Protocol

The Financial Times is reporting AIG is ignoring the new rules on derivatives.

The unit that all but destroyed AIG has failed to sign up for the overhaul of the global derivatives market which was given added impetus by the troubles at the US insurance group.

AIG confirmed that its financial products unit, whose soured bets on credit default swaps forced the company into government hands last year, did not adopt the “Big Bang” protocol that has been signed by more than 2,000 market participants.

The protocol, created under the auspices of International Swaps & Derivatives Association, is intended to make it easier for investors in the opaque market for credit derivatives to know what will happen to their contracts if debt defaults occur. It came into force on Wednesday.

Another interesting CDS story

Came across this on Forbes.  Its an interesting piece on our latest favorite financial goody, the Credit Default Swap.  Good read for those unfamiliar, though it isn't a complete primer.  Nick, want to chime in?

Who's Afraid Of Credit Default Swaps?
Robert Lenzner, 03.19.09, 6:00 PM ET




Credit default swaps, the "exotic" financial instruments at the heart of the collapse of AIG, are about to be tamed, regulated, rehabilitated and turned into the kinds of debt-based securities that respectable institutional investors will buy, hold and trade. Their frontier days are ending. Welcome to civilization.

How Bank Regulation Helped Destroy AIG

How Bank Regulation Helped Destroy AIG

What ever changes we make to our financial regulations, hopefully we'll ensure that we can never have another AIG putting the entire global financial system at risk. Unfortunately, our track record of building regulations is terrible. In fact, in many ways the last round of regulatory reform helped cause the disaster in AIG. How could AIG's destruction have been caused by banking regulation? Most people wil probably be surprised by the very idea. After all, they've been told that what really happened to AIG involved unregulated credit default swaps, insurance contracts on bonds that AIG sold across the world. They suspect AIG might have been caused by too little regulation.

Just Because it's Math Does it Mean No Criminal Charges? - AIG run like a Scam - New York Times

Just because it's one division and they covered it all up with excuses like complex math, or structured finance does it make it less of a scam and a fraud?

The New York Times article Propping Up a House of Cards has gone a little more in depth on precisely what was going on inside AIG and why (supposedly) it couldn't fail (Joe Nocera Journalist).