Thursday, November 16, 2006

Not the 3CPO fan club

Judging by the continuing number of hits to Guambat's post about constant proportion debt obligation (CPDO) instruments, there are a lot of other Alfies out there trying to understand what's it all about.

So, just to point the way to what others have to say, because Guambat is still trying to decipher R2D2, have a look at these:
CPDOs Are Derivatives Market's New Alchemy Trick (By Mark Gilbert)
CPDOs are the credit-derivatives market's latest alchemical wheeze to turn the lead of record-low yield premiums into the gold of market-beating returns. They have the distinct whiff of a Nigerian banking-scam e-mail, with the marketing literature suggesting the newfangled securities have found the holy grail of investing -- heads you win, tails you don't lose.

The securities deliver as much as 2 percentage points more than money-market rates during their 10-year life. That's worth about 5.6 percent at current three-month rates, compared with the 3.7 percent annual yield on 10-year German government debt.

This remarkable rate of return is made possible by the magic of derivatives, which leverage the initial bet by a multiplier of 15.

Now that's pretty outrageous stuff, but not nearly as entertaining as the to-ing and fro-ing of these thinkers:

Felix Salmon
The Economonitor, it seems, has found his first blog obsession – one of those themes which all good bloggers come back to over and over again. And in my case it's CDSs (credit default swaps) in general, and CPDOs (constant proportion debt obligations) in particular....

Steve Waldman
When banks use novel structured products to take on more risk than bank regulators anticipated, I am being forced to take that risk.... I bother to write about this stuff not because I am interested in the arcane details of a structured credit designed especially for bank investors. I write because I think the game is going awry, the odds of systemic crisis at the collapse of a credit bubble are growing, and CPDO-based regulation skirting is the latest little crack in the dam. Reasonable people can disagree.

Felix Salmon, again
Dizard on CPDOs: The Economonitor (Felix Salmon) was wrong -(By Felix Salmon)

Guambat was particularly amused by Steve Waldman's J.M. Keynes quote,
"A 'sound' banker, alas, is not one who forsees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him."


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