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1822 Early London/Amsterdam EM Sov bond issues Colombia, Peru, Brazil, Mexico, “Poyais“
1826-8 EM Sov default wave
1883 Cash Register US Patent; Patterson NCR Legion of Honor
1958 Modigliani-Miller Theorem – value of the firm independent of debt/equity ratio; Palgrave discussion;
1977 M&M with taxes optimal capital structure can be all debt; Miller in Journal of Finance- Debt and Taxes;
1977-1986 Drexel/M&A/LBO – Junk Bonds massive expansion of debt market across capital structure; Predator’s Ball; Den of Thieves; Liar’s Poker; Bonfire of the Vanities;
1981 First Swap: IBM-World Bank Swap
1998-2005 Credit Derivative Product Expansion: BISTRO – Synthetic CDOs, Index Protection CDX/ITRAX
2003 Secondary trading of Corporate Loans
2006 DTCC Warehouse
2008 Credit Crisis CDS Tearup, LEH Replacement CDS 14Sep: Centralized Clearing House
Lets go with ISDA’s estimate of a $60 trillion notional market at the start of 2008 with an average default swap per trade notional of $5MM. So there are 12MM default swaps out there between some Party A and another party B. Lets assume the $60 trillion is not double counting and party A is always a dealer and there are 12 dealers, so each dealer has about 1MM default swaps. Presumably JPM is on the larger side of dealer inventories and they are supposed to have $10 trillion notional default swaps – or something like 2MM positions. So in the beginning of 2008 dealers are maintaining inventories of somewhere between half and 2 million default swaps. Assuming 5 year maturity is the main liquidity point the these dealers are printing somewhere between 100K and 400K default swap trades per year (assume 220 business days per year) each dealer is doing between 500 and 2000 trades per day. Assume the larger flow desk is budgeted to pull in $1.5 Bn of revenue then the P on each trade is about 3.7 K. So the senior trader on the desk, the one that will need to stop trading and run the termination protocol for the massive default, prints 60 trades day generating 220K revenue per day. If the massive default occurs, at the very least, this senior trader entirely stops trading and instead processes the termination protocol 20,000 positions for say a month. So,
A the desk has significant risk in the completion of the termination protocol and
B the desk gives up 4MM of revenue (220,000*20)
