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Discredit derivatives: Difference between revisions
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===Early years: single-name [[turpitude put]]s=== | ===Early years: single-name [[turpitude put]]s=== | ||
Barkley’s idea was simple: if it was okay to extract the crappy credit profile from a [[CDO squared|portfolio]] of [[mortgage|mortgages]] | Barkley’s idea was simple: if it was okay to extract the crappy credit profile from a [[CDO squared|portfolio]] of [[mortgage|mortgages]] | ||
and lay ''that'' off on someone with “sufficiently deep market expertise and advanced models to bear the risk indefinitely”<ref>Yes, I know what you are thinking: a sleepy Landesbanken from Lower Saxony would be ''exactly'' such a someone, right?</ref> why not do the same thing with the unwanted ignominy of | and lay ''that'' off on someone with “sufficiently deep market expertise and advanced models to bear the risk indefinitely”<ref>Yes, I know what you are thinking: a sleepy Landesbanken from Lower Saxony would be ''exactly'' such a someone, right?</ref> why not do the same thing with the unwanted ignominy of politically awkward, but still hugely profitable, investments? If only there were away to strip out the ''shame'' from the ''yield''. | ||
Barkley began to construct instruments — at first, simple [[put option]]s — laying off the | Barkley began to construct instruments — at first, simple [[put option]]s — laying off the embarrassment on those who could most easily absorb it; namely — and this was Barkley’s real genius — ''the very badly-run, environment-wrecking corporates that were polluting the social | ||
credibility of the hedge fund portfolios in the first place''. | |||
The [[hedge fund]] would write an [[at-the-money]] [[stigma put]] to, for example, the Golden Crown Palm Oil Company of Sudan Pty. Ltd. (and for which it would ask little by way of premium; after all, really, what did Golden Crown care? It was ripping up the Bandingilo national park already, so what is a little more remorse?), thus getting rid of the fund’s disgrace for investing in ''that very company''. | |||
Objections came soon enough that this was obviously circular, but Barkley swiftly pointed out that, well, so too was [[debt value adjustment]] hedging, and everyone seemed cool with ''that'' for a good few years, didn’t they?<ref>Indeed, it kept a phalanx of banks out of [[technical insolvency]] — and their [[DVA]] traders handsomely [[Compensation|remunerated]] — for a good three or four years after the worst excesses of the [[Global financial crisis|credit crunch]].</ref> Did it present any more moral hazard than in D&O liability insurance? | Objections came soon enough that this was obviously circular, but Barkley swiftly pointed out that, well, so too was [[debt value adjustment]] hedging, and everyone seemed cool with ''that'' for a good few years, didn’t they?<ref>Indeed, it kept a phalanx of banks out of [[technical insolvency]] — and their [[DVA]] traders handsomely [[Compensation|remunerated]] — for a good three or four years after the worst excesses of the [[Global financial crisis|credit crunch]].</ref> Did it present any more moral hazard than in D&O liability insurance? | ||