TGM

In my last post on this wonderful book , I will try to summarize the Credit products highlighted in the book.

Credit Risk is managed by Commercial Banks and Market Risk is managed by Ibanks. Ibanks are not comfortable holding stuff for a long time. However with the onset of credit wars, Ibanks Vs Commercial banks, it started the biggest party of the decade, the credit derivatives party.

What’s the real use of credit derivatives ? It is not to transfer risk , it is an instrument to free up capital. Total return swap by Bankers trust was the first taste of slew of derivative products to hit the market. First to default basked was picked up eagerly by all the investors. Slowly CDS market started to bloom. Initially there were a ton of difficulties in kickstarting CDS market. The problems were , firstly, CDS is like an insurance on the credit characteristics of the loan. There was a quite a lot of time spent on details such as whether making this asset a legal asset in the first place. The other problems associated with CDS was WHO and HOW ? Who was the reference entity in a CDS and How much would the payment be ? As products become exotic WHO and HOW questions became very very complicated to answer.

Securitization and Synthetic Securitization further complicated the situations. SPV, basically unregulated banks started mushrooming everywhere. BISTRO deal created by JPMorgan started the synthetic securitization game and a game that created the biggest mess of all times. Terms such as mezzanine investor, monoline insurers, rating agencies , SPVs , Credit correlations all started becoming a common vocabulary of everyday people. and then the party stopped and we are in 2008 ..

🙂 Today Wachovia declared a loss of 27 Billion dollars for a quarter!!!! .Wow!! that’s the magnitude of mess we are in!!

Anyways , this book has no doubt been one of the best books on Derivatives that I have read till date. The very fact that I have written 3 posts on the book means a lot to me!! I would treasure this book forever and read it once a while , not for anything else, but to laugh at the world of derivatives trading. Now, I need to get back to calibrate Heston stochastic volatility model !! After all I want to be a part of this entire troupe called quants…Will try to sit and calibrate stochastic vol model for now, but once in a while , will read this wonderful book to remind myself to take it easy and chill..After all its a drama out there!!

Link to my first 2 posts relating to this book :
Traders Guns & Money – Summary Part I
Traders Guns & Money – Summary Part II

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