Archive for May 15th, 2009
Friday, May 15th, 2009
The Obama Administration on Wednesday announced a proposal to regulate the credit derivatives market as part of an effort to avoid another financial crisis. According to Smeal’s Jean Helwege, “The lynchpin of the plan is the requirement that all credit default swaps (CDS) contracts trade on a regulated exchange so that they involve a reasonable amount of capital and to increase the transparency of the market.”
But, Helwege says, “The plan to require a CDS exchange misses the crux of the crisis, as it does almost nothing to reform the current setup.” She says the country would be better served by focusing reforms in the mortgage market, specifically targeting Fannie Mae and Freddie Mac.
More from Helwege:
The motivation for this reform is the failure of the giant insurance company, A.I.G., which became financially distressed as a result of writing hundreds of billions of CDS contracts (essentially offering insurance on bonds).
The plan to require a CDS exchange misses the crux of the crisis, as it does almost nothing to reform the current setup. If the requirement is extremely onerous to Wall Street, the CDS as we know it will cease to exist and the bankers will invent a new contract that evades the regulations but includes the essence of a CDS contract. If the regulation is not onerous, the CDS will start to trade on the exchange and two changes will occur that President Obama believes are very important.
First, the trades will be written down in a central place so that regulators can observe the depth of the market and understand the prices involved in these transactions. While this sounds like a major innovation, regulators can and do buy data on the CDS market from a vendor whose coverage is quite comprehensive.
Second, the CDS exchange will require that sellers maintain a margin account and put up more cash as the CDS premium increases. The market already requires that CDS sellers put up more cash as bond default probabilities increase. Indeed, this is the source of AIG’s cash crunch—their trading partners were requiring more and more collateral as the economy collapsed and corporate bond prices declined. Putting this requirement into writing as part of a CDS exchange would not have made AIG more or less vulnerable to losses surrounding CDS contracts.
Friday, May 15th, 2009
A research paper co-authored by three Smeal marketing professors has been named the best paper to appear in the Journal of Modeling in Management in the past year. “The Simultaneous Identification of Strategic/Performance Groups and Underlying Dimensions for Assessing an Industry’s Competitive Structure” was published in Vol. 3, No. 3, of the journal in 2008. Its authors are Wayne DeSarbo, Smeal Chair Distinguished Professor of Marketing, Rajdeep Grewal, professor of marketing, Qiong Wang, assistant professor of marketing, and Heungsun Hwang of McGill University.
The complete paper is available online here.