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Discredit derivatives: Difference between revisions
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Barkley’s idea was simple: if it was okay to extract the crappy credit profile from a [[CDO squared|portfolio]] of [[mortgage|mortgages]] off 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 outrageous investments? | Barkley’s idea was simple: if it was okay to extract the crappy credit profile from a [[CDO squared|portfolio]] of [[mortgage|mortgages]] off 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 outrageous investments? | ||
Barkley began to construct instruments — at first, simple [[put option]]s — laying off the shame on those who could most easily | Barkley began to construct instruments — at first, simple [[put option]]s — laying off the shame 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 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? | ||