CDPC and monoline write-downs add to bank’s woes
New credit losses contributed to trading losses of between £7 billion and £8 billion for 2008, according to a trading update released by a UK bank today
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CDPC's provide the agencies with frequent reports on their risk exposures and their capital adequacy/model based capital requirements; Some of CDPC's made bad bets on single name CDS and had to be downgraded, but overall they are in much better than the monolines. Furthermore, CDPC's were never allowed to maintain the same amount of leverage as the monolines to begin with - due to numerous "outside the model" rating requirements. Requiring counterparties to post collateral based on rating triggers creates the potential for immediate, severe capital strain - and is precisely what led to the swift downfall of AIG. This can impact other large institutions with large fx/rates/cds swaps books if/when the agencies stop pretending and take the rating actions that properly reflect the degree of impaired assets and mark to market losses these institutions face.
clearly, trading with CDPCs and monolines cannot be anything more than a drop in the bucket of risk managment failures of most banks
Who bet thought CDPC's would outlive AIG, FNM, FRE, and other highly rated financial institutions. The jury is still out but a conservatively managed CDPC has staying power given the non-collateral posting dynamic of the business model.
The last comment is totally fair. After all many CDPCs are insolvent on an MTM basis. But if you're going to take this purist approach, and properly model and price the characteristics of counterparties, why stop at CDPCs? Many banks are probably insolvent on an MTM basis as well. It's true that most do post collateral on their derivatives exposure, but this is not certain to protect counterparties against a sudden default in a volatile market ...
I believe it is wrong to take the view that CDPCs can be viewed as a going concern and that the ability of the CDPC to manage through the crisis is a strength and benefit for counterparties. Many banks were involved in buying (junior) super senior protection from CPDCs. It is fair to say that those positions would have been marked to market (e.g. using base correlation or such like). HOWEVER a CDPC is itself a complex CDO^2 where because of the thin capitalisation amd the lack of collateralisation you effectively have the situation where the counterparties of the CDPC are simultaneously SELLING protection on this complex CDO^2. This is not a risk that was accurately priced - and now this exposure is coming back to bite people. You can't reasonably take a derivative model approach to the transactions without taking the same approach to the counterparty risk in this case where it is so transparent.
There is no breakdown in RBS's statement of their CDPC exposures by type of CDPC - just a single number of a £0.6 billion reserve. This is a preliminary earnings announcement prompted by the new government bail-out. So perhaps there will be more detail when RBS announces its final results in February.
RBS has to follow the lead of their auditors and of course the Government. This number clearly represents some percentage of their mark to market exposure the CDPC's. Does their disclosure (beyond the raw number) provide any breakout of RBS's single name, mezz tranche and super senior tranche? Also, as far as I know, none of the CDPC's are bankrupt or have going concern issues. That model benefits in a crisis from not having to post collateral. Counterparties may not like this but it provides the CDPC with the opportunity to manage through the crisis. That is a major strength not a weakness. Had the CDPC's been a market value model, ala a SIV, they would have long ago faded from the scene. RBS is better off facing a CDPC then a lot of the other counterparties they may be facing at the moment.
I don't disagree although have any of those things (CDPCs) actually blown up? So is this loss just another MTM loss? CDOs of ABS (which in reality are only ever CDOs of US Subprime) are I assume real losses...
It truly beggars belief that banks ever entered into a derivative trade with a CDPC. With the way they were structured (no collateralisation) it was always a total disaster waiting to happen. Ditto monolines. It was always about the accounting games that could be played with these highly rated entities. Fundamental irresponsibility on behalf of front office and complete failure by the credit departments.
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Comment by: Anonymous. Posted 15 years ago [2009-01-30 17:34:51]