John Pitera's Market Laboratory Message Board

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Strategies & Market Trends : John Pitera's Market Laboratory

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To: Stoctrash who wrote (12034)	2/27/2009 9:20:27 PM
From: John Pitera	2 Recommendations Read Replies (2) of 33421

CDS* That's why I was highlighting back on September 12th 2005 this problem with the Credit Default Swap models. Correlations broke down from what they were theoretically supposed to do. The FED and the the market cognescenti were on to the problems with math wizard like David X. Li Gaussian copula function way back in Sept of 2005. The FED with Geither was already convening special meetings with the 16 largest players in credit default swaps. Just have a perusual of the below posts, enough to put a chill in the air. John Message 21696564 Message 21638663 The Federal Reserve had sounded the fire alarm back in Sept of 2005 when they were having these extraordinary meetings with the key financial players, the first meetings of this nature since Long Term Capital Management blew up in 1998. Message 21706035 and my prediction that came to pass... from way back in Sept of 2005: To: John Pitera who wrote (7188) 9/15/2005 12:51:39 PM From: John Pitera Read Replies (3) of 12042 I am pretty sure that the problems with credit default derivatives especially the inability to accurately assess counter-party risk and counter party solvency* are going to be a major factor in the next financial system blow up. The timing of this will probably coincide with an upcoming quick 275- 300 basis point sprint in the 10 year yield. The bottom line is that with the daisy chaining of these sales and resales of the credit default protection contracts. Some players will end up overextended and unable to cover their default exposures.* ( editorial note from JP, that was LEH, Bearn Sterns, AIG, C, MER, et al....) The Valuation issue begs for misuse and future litigation as hedge fund managers etc get sued for overstating the value of their contracts and getting paid 20 % of the inflated estimated value. John Message 21706065

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