Credit Default Swaps

CREDIT DEFAULT SWAPS 

Update: This guide was originally done back in the Spring, but credit default swaps continue to be a huge problem. In a recent article by Gretchen Morgenson (who, we note below, has been on top of the story since the beginning) she points to two solutions. The article is: "It's Time to Unravel a Financial Knot," New York Times, Jan.25, 2009. The solutions she discusses are found here: creditspectrum.com

The purpose of this brief guide is to direct you to resources related to the subject of "credit default swaps" which, some argue, are the current cause for a great deal of concern. Alarms were sounded a while back in an article in the New York Times by Gretchen Morgenson who described these instruments as "arcane", an assessment with which we concur. See" Arcane Market is Next to Face Big Credit Test," Feb. 17, 2008 and her more recent "Rescue Me: A Fed Bailout Crosses a Line,", March 16, 2008, both of which are in the Times (which is available to you via Factiva, ProQuest or Lexis/Nexis.)

Explanations and descriptions of credit default swaps appear in both Wikipedia and Investopedia, but we offer here some information from published and proprietary sources. A list of books is followed by suggestions about additional articles. To see the pertinent section in each book, simply click on the link for each.

SELECTED BOOKS

Anson, M. J. P. (2004). Credit derivatives :Instruments, applications and pricing . Hoboken, N.J.: Wiley.

Bomfim, A. N. (2005). Understanding credit derivatives and related instruments . Amsterdam: Elsevier Academic Press.

Calamos, N. (2003). Convertible arbitrage :Insights and techniques for successful hedging . Hoboken, N.J.: John Wiley.

Chacko, G. (2006). Credit derivatives :A primer on credit risk, modeling, and instruments . Upper Saddle River, N.J.: Wharton.

Chacko, G. (2006). Financial instruments and markets :A casebook . Hoboken, NJ: Wiley.

Dubil, R. (2004). An arbitrage guide to financial markets . Chichester, West Sussex, England ;; Hoboken, NJ: John Wiley & Sons, Inc.

Duffie, D., & Singleton, K. J. (2003). Credit risk :Pricing, management, and measurement . Princeton, NJ ;; Oxford: Princeton University Press.

Fabozzi, F. J., & Choudhry, M. (2004). The handbook of european fixed income securities . Hoboken, N.J.: J. Wiley.

Focardi, S., & Fabozzi, F. J. (2004). The mathematics of financial modeling and investment management . Hoboken, N.J.: Wiley.

Lando, D. (2004). Credit risk modeling :Theory and applications . Princeton, N.J. ;; Oxford: Princeton University Press.

Rajan, A., McDermott, G., & Roy, R. (2007). The structured credit handbook . Hoboken, N.J.: Wiley.

SELECTED ARTICLES

Articles are easily found using a variety of databases since the subject is getting considerable attention. See, for example, the recent piece in Time/CNN, "Credit Default Swaps: The Next Crisis?" by Janet Morrissey, Mar.17,2008. See also: "What Created This Monster?" by Nelson D. Schwartz and Julie Creswel, the New York Times, Mar. 23, 2008, p.B1. Here are two of the earliest articles we have found and it appears that the instrument was invented in the early 1990s. "Credit derivatives get cracking ," Mark Parsley, Euromoney, No.323, March 1996, p.28 and "Credit derivatives: New financial instruments for controlling credit risk", Robert S. Neal, Economic Review - Federal Reserve Bank of Kansas City. Kansas City:Second Quarter 1996. Vol. 81, Iss. 2, p. 15.

Allan, Sloan. (2008). "On the brink of DISASTER". Fortune, 157 (7), 78.

Bizouati, Y. (2008)." Big problem, but for how many? moody's says impact of monoline cuts would be felt by about 20 banks and brokerages". The Investment Dealers' Digest : IDD, , 1.

Braham, B. L. (2008). "Credit default swaps: Is your fund at risk?" Business Week, (4073), 74.

"Business: Waiting for armageddon; bankruptcies in america".(2008). The Economist, 386 (8573), 84.

Coy, B. P. (2008). "Bonds are saying nasty things about stocks." Business Week, (4075), 70.

"Finance and economics: Gross exaggeration; credit derivatives".(2008). The Economist, 386 (8565), 83.

Larsen, P. T. (2008, Mar 26). "Who needs these troublesome banks anyway?" Financial Times, pp. 4.

Scott Patterson and Serena NG. (2008, Apr 1)." Ahead of the tape". Wall Street Journal, pp. C.1.