Charles Davì

Indexed Archive

Understanding Custom OTC Derivatives

Asset Bubbles and Economic Activity

FT Interview With Mandelbrot

Naked CDS: Exposed

Understanding The OTC Derivatives Market

Understanding Obama’s Financial Overhaul

Could Government Intervention Help Markets Function Better

Rethinking Central CDS Counterparties

The Sorry State Of The Dismal Science

Credit Default Swaps and Control Rights, Redux

Credit Default Swaps and Control Rights

The Regulatory Pendulum And Electoral Guillatine

How To Speak “Structured Finance”

Surely Schadenfreude

The Fallacy Of Home Prices And The Reality Of Mortgage Modification

The Anatomy Of Deflation

Synthetic CDOs, Ratings, And Super Senior Tranches: Part 3

Synthetic CDOs, Ratings, And Super Senior Tranches: Part 2

Synthetic CDOs, Ratings, And Super Senior Tranches: Part 1

Tranches And Risk

You’re Trespassing On My Credit Event

Mark To No Market Accounting

Synthetic CDOs Demystified

A Conceptual Framework For Analyzing Systemic Risk

Securitization Demystified

Derivatives/Synthetic Instruments Demystified

Netting Demystified

Systemic Counterparty Confusion: Credit Default Swaps Demystified

The Not So Efficient Market (Theorem) Hypothesis

  1. Have you ever written about Derivatives and Bank Insolvency?

    I am wondering if I understand this right: in a banking insolvency, those with derivative contracts with the failed bank get netted, and collateral absorbs losses. The conservator can transfer contracts to another bank, if it would be the best result. After all that, then if the failed bank still owes anything to the derivative counterparty, which happens?

    • The derivative counterparty is superior to senior unsecured clients for the remaining claim, and gets paid before senior unsecured, or
    • The derivative counterparty is pari passu with senior unsecured clients for the remaining claim.

    Any help you would give me with this is appreciated.

    • We need to be precise – “banks” aren’t eligible for federal bankruptcy, but instead go into FDIC insolvency. Broker Dealers (e.g., Lehman) are eligible for bankruptcy. There are similar rules for derivative contracts in both cases, but I wanted to clear up which you were asking about first.

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