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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (55135)	3/3/2006 11:45:40 AM
From: westpacific	Respond to of 110194

Old news Russ.... West

To: russwinter who wrote (55135)	3/3/2006 12:43:59 PM
From: Gemlaoshi	Respond to of 110194

Russ, There was an update on the working group in the WSJ on Wednesday of this week. At least Geithner is forcing discussion of the issues before a crisis hits...his success remains to be seen. online.wsj.com Concerns Dog Credit Derivatives Industry-Group Symposium Explores Market Imbalances Bankruptcies May Trigger By HENNY SENDER March 1, 2006; Page C3 How to anticipate problems in the fast-growing market of credit derivatives? The effort continues today as a symposium looking at the potential issues in the market gets under way. The symposium is organized by an industry group known as the Counterparty Risk Management Policy Group II, headed by E. Gerald Corrigan, a former president of the Federal Reserve Bank of New York and current Goldman Sachs Group Inc. executive. Its agenda includes examining potential systemic risks in the credit-derivatives market. The symposium follows a meeting Feb. 16 at the New York Fed at which 14 dealers in the credit-derivatives market reported on their progress in dealing with operational and technical issues. Credit derivatives function as a sort of insurance policy, enabling investors to receive compensation when companies or countries default on their debt. The focus on the market comes as credit losses have been low and banks are strong. Still, the way the market temporarily seized up last spring -- triggered by the unexpected downgrade of General Motors Corp.'s debt and issues that arose out of the Chapter 11 bankruptcy-protection filings of auto-parts companies including Collins & Aikman and Delphi Corp. -- has prompted a deeper look. While activity has soared, in part driven by hedge funds, the dealer base making markets in credit and other derivatives has remained relatively small and concentrated. "The size of gross exposures and the extraordinarily large number of contracts suggest the scale of the unwinding challenge the market would confront in the event of the exit of a major counterparty," Timothy Geithner, president of the New York Fed observed in a speech yesterday. Mr. Geithner added that the 10 largest U.S. banks have about $600 billion in net potential credit exposure in the derivatives market, and that exposure represents about 20% of their total credit exposure. Banks have increased their exposure to the credit-derivatives markets by about 15% relative to their capital over the past five years. Some regulators are concerned about how much borrowing, or leverage, is in the credit-derivatives markets. Leverage exaggerates the impact of unexpected moves in the market. In his speech, Mr. Geithner called for improved risk management, especially "in the discipline of stress testing and scenario analysis to capture potential losses" and urged participants to pay attention to how a market crisis could amplify losses. While the market has weathered the Chapter 11 bankruptcy filings and defaults of individual companies, regulators remain concerned about the potential strain caused by the possible filing of a much larger company, such as General Motors; GM executives say they have no such plans. Part of the concern has to do with the imbalance between the number of cash bonds compared with the huge number of derivatives based on those bonds. A second concern is whether the existing trading and settlement infrastructure can cope with the volume of activity that would result from a large bankruptcy filing, however widely anticipated. But some efforts at reform have had some impact. "With experiences from other recent credit events and our proposal to cash settle net positions, the credit-derivatives industry would weather a GM credit event better now than it would have several months ago," says Robert Pickel, chief executive officer of the International Swaps and Derivatives Association. Write to Henny Sender at henny.sender@wsj.com