Tuesday, December 22, 2009

Collateralized Delay Obligations, the new CDO's

You HAVE to read this: If Wall Street Ran the Airlines …

But start with this. In short, after horror stories of people growing too old for Medicare on the tarmac, the Govmint has lowered the boomgate on the "practice" of off-loading over- booked planes onto the tarmac.

But, back to the new CDO's -- a teaser:
The problem, experts say, is that the government rushed to create new regulations without considering how market forces could solve the problem. “Clearly, if consumers placed a value on a maximum runway wait time, they would have negotiated it with their airlines already,” said Petra Waterman of the American Enterprise Institute. “Since no airline offers such a contract term, we can assume that consumers place no value on it. Besides, if consumers were not happy with the service they receive from airlines, then a new airline would have already entered the market offering shorter wait times.”

Ella Ringding of the U.S. Airlines Association agreed that extended tarmac wait times are a problem, but said that the solution should be left to the industry. “The U.S. Airlines Association takes very seriously any issues that reduce the satisfaction of our customers,” she said. “We have drafted a model code of conduct for all of our members to address this problem. According to the model code, airlines should notify passengers whenever they happen to be on a flight that has been waiting on the tarmac for more than three hours, and should repeat that notification every hour. We believe that by providing sufficient disclosure to our customers, they will be able to make the air travel choices that best suit their individual needs.”

However, not everyone is upset with the new regulation. One Goldman Sachs derivatives trader, who asked to remain anonymous because he is not authorized to speak about company strategy, said that the firm is planning to create a market for derivatives that airlines can use to hedge against the risk of having to return planes to the terminal or having to pay fines to the FAA. Goldman is thinking of creating “collateralized delay obligations,” or CDOs, which will diversify wait-time risk by including flights from across the entire country.



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