Sunday, March 19, 2006

Ford + GM = Canada + US

Financial Mathematics: Seminar

Check out the Credit Markets in 2005 Presentation. Ford & GM comprises around 1/3 of the bond market.

Also a good primer on Credit Default Swaps (CDS) - insurance if (when) the creditor defaults, the creditholder gets 40% on the dollar.

As you go down the indices (CDX1 - CDX5) you get into more risky trading. When CDX6-10 show up, my guess is that we are in deep trouble.

But wait.. instead of doing this they created X05 "to contain toxic fallen angels like FMCC and GMAC"

Wow. In order to trade these now, the creditor needs to front some cash for compensation in protection schemes.

One of the blames, notes the presenter, is Bush's failure to bailout the sector.

Bankruptcy and Chapter 11 are mentioned, with notes that C11 allows for nullification of union contracts, the ability to cut healthcare & pensions, and shut down factories.

The liquidity cycle: Asian countries peg their currencies and buy Treasuries _> US can maintain low interest rates -> US consumers borrow to buy cheap
made-in-China (or generally Asian) imports -> Asian economies grow -> Asian governments keep currency pegs -> Asian countries buy more Treasuries…

When those arrows reverse & buy turns to sell.. what happens?

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