Industry Open-Sources Model For Infamous CDS 161
GlobalEcho writes "Credit default swaps (CDS) are infamous for bringing down AIG and requiring a bailout of hundreds of billions of dollars. Because the market for these was so murky, the US government has insisted that Wall Street create a clearinghouse for these contracts. In a fresh twist, part of the deal is that the models used to price CDS have been standardized, and that the pricing code was made open source, under a somewhat BSD-like license. The source code (originally written by JPMorgan) provides the basic pricing routines, plus an Excel interface. To my knowledge this is the first significant migration of an investment bank product platform from its usual super-secret proprietary home to the rest of the world."
Re:But... but... (Score:5, Interesting)
Microsoft has said that Open Source is communist and Anti-American! How can the business community survive, now that their broken algorithms have been published?
Maybe you haven't been paying attention. For the past four months, all the CEOs of all the banks have been singing the praises of communism. They were so convincing, in fact, that the government handed them $350 billion with no strings attached (which they promptly spent on themselves, bonuses for their lackeys, and on buying distressed companies).
The banks aren't any more anti-communism than Microsoft is. IE: They oppose it when it benefits others or non-executives, and support it when it keeps them and the rest of the American Aristocracy in beach houses and private jets.
And in that, they are no different than anyone else, except the extreme rare few who strive for objectivity and reason. Extremely endangered are they, though - I believe there are three hundred sixty four known examples of such people in the wild, and but few of them have formed breeding pairs.
Open does not make them any better (Score:3, Interesting)
Comment removed (Score:3, Interesting)
Re:This is the litte formula (Score:4, Interesting)
Well, it's not the model that tanked AIG, it's that the contracts allowed AIG to write insurance with no capital reserves, because they were rated AAA. Of course, they're AAA because the have regular income from their insurance businesses, and access to capital markets, and were pretty damn big. This is stupid, because they went on to write as many contracts as big AAA rated company is allowed to.
So many problems we have come down to credit ratings manipulation, that I'm ready to demand that they be shut down, and never relied upon. A credit rating is ephemeral and subject to violation of trusted 3rd parties; cash downpayments aren't.
If they had only done that sooner (Score:3, Interesting)
This is a really good idea. Not because this code is any good. In fact it is quite obvious that whatever code Wall Street used to price CDS did not quite work, as AIG (who I am sure used a Wall Street bank for advice) was not able to correctly price these. So this is a classic situation of someone opensourcing code that is known to be useless, in order to get some good will out of it.
But if the code is open sourced, at least people will be able to analyze it and know how worthless it is. So when somebody wants to buy shares in a bank or an insurance company, he/she can look at the code used to price that company's assets and liablities and will know how much to trust the company's books.
There was a story a couple of months ago that some people examined the computer code that rating agencies used to rate mortgage backed securities. They asked the rating agency to plug in the code a slight decrease in home prices to see what prediction the code makes. The rating agency said that that would be impossible because the code was written under the assumption that housing prices never fall!!!
Unsurprisingly all major rating agencies rated most mortgage backed securities AAA right before the market crashed, and thus fucked over shitloads of investors that were stupid enough to believe them.
Now if an investor had access to the code, they might know that the rating agencies are full of shit and not trust their ratings.