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Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2007-01-26 09:14
Depends. There are some papers by Duffie with a statistical approach. Schoenbucher, Yu and a few more published papers about default contagion in reduced form/intensity models. What are you looking for ?

"No trade with death / No trade with arms / Dispense the war / Learn from the past"

simonsays


Total Posts: 66
Joined: Jan 2006
 
Posted: 2007-01-26 15:25
I guess what I'm really after is a model for what underlies spread compression, or a credit bubble, which seems to relate directly to default contagion.  i.e. something that incorporates the notion of limited investor attention (Hong/Stein) or informational cascades.

Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2007-01-27 10:18
You might want to have a look at Fan Yu's paper ("Contagion in intensity models" or so). I don't have it here but you should be able to find it on defaultrisk.com.

Protter wrote a few interesting papers about information asymmetry, comparing structural and reduced form models. Maybe this helps, too.

"No trade with death / No trade with arms / Dispense the war / Learn from the past"

kr
Founding Member
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Posted: 2007-01-27 13:36

imho this is all trying a bit too hard

the point about spread compression, dropping corrs etc is a structural supply/demand thing

I am reading on bbg just now that eurozone M3 is ca. 10% against growth which is way below that.  If there is a macroeconomist in the house, it would be nice to hear the story on how money supply growth gets allocated to consumption vs. investment.  My assumption is that there is too much of the latter (petrodollar effect and maybe something to do with the barbelling of consumer wealth?)  You could model it randomly but I am not sure where one would start. 

Negative credit risk premia are not any more impossible than negative real rates.  I sometimes think there is a kind of relation between the two and the relative pricing control split between central banks and commercial banks.  Let's say ST interest rates are 10%.  A commercial banker is not going to differentiate credit risks by moving the credit spread he charges from +10bps to +20bps.  On the other hand if rates are 1%, then all the power is in the hands of the bankers if they are talking about switching from +100bps to +150bps.  It is a bit different from asset managers who are floating-benchmarked vs. HF's and their famous 'absolute returns' mantra.  Earning alpha just ain't the same when rates are increasing.

Anyhow it's clear that money is seeking to own existing assets, which are sourced through LBOs and other corporate transformations.  You can see the gold rush occuring in the PE space.  It is a shame that we don't have the optimism about growth to justify creating new assets.  In my mind the issue there is labor costs which are so high. 

The thing is that even if we have negative credit risk premia, I don't really feel that it is stopping the cycle.  For instance, HF returns haven't been that great, but I haven't seen a lot of news about attrition in the HF sector.  In fact, a lot of people got caned on CDO investments not all that long ago but the beat goes on.   


my bank got pwnd

JabairuStork
Beat Box King

Total Posts: 970
Joined: May 2004
 
Posted: 2007-01-27 17:04
Yes, I will pay you CRAZY MAD DOLLAS to take my money and put it at risk!

Why will I do this?

Because I can finance like nobody's bizness from some other SUCKA!

Point taken on the loan side, but when you look at the big macro drivers of AA/AAA corp paper, it looks like "desperately seeking spread", hence the massive bid for all the fun levered paper and synthetics like the very one that started this thread.

I don't care if spreads compress to 1/100 of a bp, we can find a way to inject enough risk to pump it back up to where yankee banks and european regional banks and all the other usual cats will be happy. But as soon as they go negative, fuck it, I'm packing up and moving to home equity loans.

simonsays


Total Posts: 66
Joined: Jan 2006
 
Posted: 2007-01-27 19:48

Thanks for the references.

While it would be nice to have something beyond economic storytelling, perhaps that will have to work for now (Money of the Mind).  Agency and conflict of interest seem to be playing their role.  I wonder of the structurers of CPDOs will get some TV time at a congressional hearing.

Related to the issue of liquidity, I like this paper.


Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2007-04-11 09:34
There is a special report from Moodys called "CPDOs: A Primer" floating around on their homepage. Unfortunately I cannot access it, could anyone mail me a copy ?

"No trade with death / No trade with arms / Dispense the war / Learn from the past"

baghead


Total Posts: 865
Joined: Sep 2004
 
Posted: 2007-04-11 10:41
on your email.

Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2007-04-11 11:18
Thanks baghead.

"No trade with death / No trade with arms / Dispense the war / Learn from the past"

baghead


Total Posts: 865
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Posted: 2007-04-11 11:34
no worries. let me know if you have cares in a managed one.

Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2007-04-11 13:56
Will do. I am currently looking at a managed one, but the fee structure reminds me of highway robbery Wink.

"No trade with death / No trade with arms / Dispense the war / Learn from the past"

baghead


Total Posts: 865
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Posted: 2007-04-11 14:12

I'll make you an offer you can't refuse......


Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2007-04-11 15:04

Dood, I know your number plate and once in a while I have enough time for a little entertainment.

 


"No trade with death / No trade with arms / Dispense the war / Learn from the past"

baghead


Total Posts: 865
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Posted: 2007-04-11 15:08
I apologise for Cheng to all Algerian/Northern African phorum members for this inappropiate post

Skillionaire


Total Posts: 187
Joined: Mar 2007
 
Posted: 2007-04-26 20:31

I cannot say much about the rating but anything that pays 200 bps in the current environment cannot be AAA.

Fitch and DBRS seem to agree with you (from creditsights.com, published 4-25-07):

Last week two of the Nationally Recognized Statistical Rating Organizations (NRSROs) released commentary on Constant Proportion Debt Obligations (CPDOs).  Fitch Ratings and DBRS both indicated that the first generation of instruments warrant ratings closer to single-A rather than the triple-As assigned by S&P and Moody's.

The recent comments given by these players echo very closely the positions we have previously laid out for the analysis of CPDOs and hence not surprisingly we agree with much of it.  Our initial assessments reflected our view that CPDOs are far too reliant on a particular ratings methodology to be the high quality products they are purported to be.  In short, we felt that the major weaknesses of the vehicles were the possibility of a lacking rolldown effect, the possibility of a late cycle widening, the possibility of fallen angels without spread recapture (i.e. idiosynchratic risk), the possibility of a prolonged low spread environment, and a detrimental reliance on the index and its odd name selection.........changing the assumptions even to a set of very benign spread environments causes the percentage of successful runs to fall to a level we feel is more commensurate with BBB to BB ratings.

*I apologize in advance for any typos - cutting and pasting from this site is impossible.

 

 


"First God, then man, horse, dog. Then women. Then rat."

Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2007-04-27 09:05
Both DBRS and Fitch did some backtesting to see what would have happened if you did a CPDO at some time in the past. Depending on timing there is a fair chance that the CPDO trades as low as 15% of initial NAV. Quite a nasty surprise for something that looks AAA in the beginning.

"No trade with death / No trade with arms / Dispense the war / Learn from the past"

rowdyroddypiper
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Posted: 2007-04-28 00:28

Both DBRS and Fitch did some backtesting to see what would have happened if you did a CPDO at some time in the past.

Slagging off the other agencies methodology relating to products for which you have ~0 market share is old hat amongst these guys.  Not to say I agree with how you get to a AAA for a CPDO, just that Fitch and DBRS are much more incentivised to shine a light on a market they have not share in than in their own back yard.  Cheng, do you have their backtesting piece?  I'd like to look at it if possible. 


We are awakened with the axe, night of the living dead at last

Cheng


Total Posts: 2864
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Posted: 2007-04-28 09:39
RRP, I think their intention is totally clear and nobody will ask these guys to rate a CPDO. But isn't this just the interesting thing, to have some competing opinions from the underdogs Cool ?

I have a couple of them, will post it on Monday. The basic idea is always the same but to see how much this stuff depends on model assumptions is really scary. As a colleague of mine put it: "These things are similar to SIVs but SIVs are much more regulated and monitored."

"No trade with death / No trade with arms / Dispense the war / Learn from the past"

rowdyroddypiper
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Posted: 2007-04-28 18:06
As a colleague of mine put it: "These things are similar to SIVs but SIVs are much more regulated and monitored."

That is an excellent point. In fact my boss has gotten it in his head that he wants to set up an SIV. I was on the verge of suggesting just doing a CPDO as SIVs are reporting and administrative nightmares. This is why I want to see these pieces. Despite the fact they generally aren't what I'd call experts, RAs are the tail that wag the dog in many markets. I've been spending the better part of two months getting firmly kicked in the nuts and it seems like the RAs went home and put on golf spikes for round two. I mean Moody's came out and said they were moving ratings on new issue CMBS 1 to 1.5 notches maybe more on a go forward basis. This necessarily implied that the bonds from a deal that I just (seriously, march 07) paid them 1MM a piece to rate are now percieved as having heightened downgrade risk with no change in collateral performance.
Thanks guys!


We are awakened with the axe, night of the living dead at last

Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2007-04-30 08:43

There is some new invention called "SIV light". Similar to a SIV in spirit but less cumbersome to set up. I think I have some presentations floating around in case you are interested.

RAs are wankers when it comes to structured credit. Even if their assumptions are not totally off the results usually are. The worst thing is that you have to pay for getting screwed Puke

Attached File: Fitch_First Generation CPDO.pdf

Seems like the other one is too big to be uploaded. I'm gonna shoot you a mail.


"No trade with death / No trade with arms / Dispense the war / Learn from the past"

Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2007-04-30 08:57
Note that all these papers are about the so called First generation CPDO, ie investing in an index portfolio and rolling every 6 months. Lately different structures appeared with managed bespoke portfolios, time-dependent leverage etc. Dunno how good or bad those are.

"No trade with death / No trade with arms / Dispense the war / Learn from the past"

rowdyroddypiper
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Posted: 2007-05-03 17:09

Gracias for the paper.  I'd be very interested in seeing anything you have on an SIV light. 


We are awakened with the axe, night of the living dead at last

Cheng


Total Posts: 2864
Joined: Feb 2005
 
Posted: 2007-05-04 08:53

I attached two, one about a bank loan (read: leveraged loan) SIV and one about a SIV light. Both are rather short but outline the general ideas.

Attached File: Bank Loan SIV.pdf

Attached File: SIV light.pdf


"No trade with death / No trade with arms / Dispense the war / Learn from the past"

AMRO Only


Total Posts: 5
Joined: May 2007
 
Posted: 2007-05-04 16:22

If you're interested in the DBRS report drop your mail address here.

 


MadMax


Total Posts: 424
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Posted: 2007-05-04 16:34
Baghead:"I apologise for Cheng to all Algerian/Northern African phorum members for this inappropiate post"

What was that supposed to mean?
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