Uhm, Gretchen: Repo and CDS Are *Not* the Same
Gretchen Morgenson is getting good reviews for her book Reckless Endangerment, which unlike most of the financial crisis genre casts considerable blame on Fannie and Freddie. So bravo for that.
But sometimes she can be so clueless. I mean really: how can she not understand the difference between credit default swaps (“complex swap deals it had struck with its trading partners”) and repo? She goes on and on comparing MF Global to AIG, claiming both were brought down by CDS. Then she goes into a riff on CDS written on Greece, and credit linked notes, and ISDA, and blah blah blah.
Gretchen: secured lending–repo–brought down MFG. You could have written something interesting about the repo market, how it works, how it is a fragile form of financing that can bring down firms. That would have been informative and useful. But to flog the CDS horse when CDS aren’t even involved. Sheesh.
I agree with you completely! CDS and (bilaterally cleared) OTC derivatives have been so overly demonized. It’s always innuendo, but I’ve yet to see a smoking gun…
Comment by Kiffmeister — November 7, 2011 @ 8:12 pm
Thanks, Kiffmeister. Yeah, the only things smoking are those making the innuendos, but I won’t make any innuendos about what they’re smoking 🙂
I’ve been rolling this rock up the hill for the last 3+ years. It’s getting kind of old.
[…] that got exploded by collateral calls. And getting that wrong would be sort of stupid, so lots of people – including, with majestic disdain, ISDA itself – pile on and call her a moron. Or at […]
Pingback by In Which Gretchen Morgenson Gets Credit For Understanding Derivatives | Jackson-Hole news — November 8, 2011 @ 9:33 pm
Here’s an IMF Working Paper that is in line with your critique. No. 11/256: Velocity of Pledged Collateral: Analysis and Implications.
Abstract: Large banks and dealers use and reuse collateral pledged by nonbanks, which helps lubricate the global financial system. The supply of collateral arises from specific investment strategies in the asset management complex, with the primary providers being hedge funds, pension funds, insurers, official sector accounts, money markets and others. Post-Lehman, there has been a significant decline in the source collateral for the large dealers that specialize in intermediating pledgeable collateral. Since collateral can be reused, the overall effect (i.e., reduced ‘source’ of collateral times the velocity of collateral) may have been a $4-5 trillion reduction in collateral. This decline in financial lubrication likely has impact on the conduct of global monetary policy. And recent regulations aimed at financial stability, focusing on building equity and reducing leverage at large banks/dealers, may also reduce financial lubrication in the nonbank/bank nexus.
http://www.imf.org/external/pubs/cat/longres.aspx?sk=25332.0
Comment by markets.aurelius — November 9, 2011 @ 11:43 am
[…] that got exploded by collateral calls. And getting that wrong would be sort of stupid, so lots of people – including, with majestic disdain, ISDA itself – pile on and call her a moron. Or at least: […]
Pingback by In Which Gretchen Morgenson Gets Credit For Understanding Derivatives — Clearing and Settlement — November 12, 2011 @ 2:21 am