×

Welcome to the Slashdot Beta site -- learn more here. Use the link in the footer or click here to return to the Classic version of Slashdot.

Thank you!

Before you choose to head back to the Classic look of the site, we'd appreciate it if you share your thoughts on the Beta; your feedback is what drives our ongoing development.

Beta is different and we value you taking the time to try it out. Please take a look at the changes we've made in Beta and  learn more about it. Thanks for reading, and for making the site better!

Industry Open-Sources Model For Infamous CDS

ScuttleMonkey posted more than 5 years ago | from the further-down-the-transparency-highway dept.

Software 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."

cancel ×
This is a preview of your comment

No Comment Title Entered

Anonymous Coward 1 minute ago

No Comment Entered

161 comments

source code links (3, Informative)

Anonymous Coward | more than 5 years ago | (#27016439)

Links are good (1)

tqft (619476) | more than 5 years ago | (#27017067)

I downloaded the stuff (see down page) and I also just checked the Ac's links they are good

Re:source code links (1)

lysdexia (897) | more than 5 years ago | (#27017411)

Asinine javascript popup:

"The page at http://www.markit.com/ [markit.com] "

"To enable download please use your work related email address instead"

Someone is a bit unclear on the concept. :-)

Thanks for the direct link, it works fine.

But... but... (0, Offtopic)

jd (1658) | more than 5 years ago | (#27016459)

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? We're doooooooomed!

Re:But... but... (0)

Anonymous Coward | more than 5 years ago | (#27016511)

Nope. Microsoft has a problem with the GPL, not Open Source. Check their website number for more details, but they've made sample code, etc available since the mid 80s, if not earlier.

Re:But... but... (0)

Anonymous Coward | more than 5 years ago | (#27016611)

Sample code for how to use an API is not even close to open source.

Not sure what your all-encompassing 'etc' actually would refer to.

And here's Bill himself decrying 'hobbyists': http://www.blinkenlights.com/classiccmp/gateswhine.html [blinkenlights.com]

Win 1.0 wasn't even released until '85. Or are you actually claiming they open sourced DOS?

Get back to work, MS shill.

Re:But... but... (1)

morgan_greywolf (835522) | more than 5 years ago | (#27016735)

Considering that most of MS-DOS was written in 8086 assembler, open sourcing it was a rather moot point. That's one reason why clones like DR-DOS were able to exist.

Re:But... but... (5, Interesting)

Bob9113 (14996) | more than 5 years ago | (#27016911)

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.

Re:But... but... (1)

EvilBudMan (588716) | more than 5 years ago | (#27017209)

funny but sad but true. I think we have all figured out now it's just going to be more of the same.

Re:But... but... (2, Insightful)

radtea (464814) | more than 5 years ago | (#27017269)

For the past four months, all the CEOs of all the banks have been singing the praises of communism.

Actually, no: the parasites running American banks have been singing the praises of National Socialism, which is a political and economic doctrine that states certain industries or companies are so important to the wellbeing of the Reich... err... Homeland that they must not be allowed to fail even though they remain in private hands.

Most of the American political class of both parties are also in favour of national socialism. So far it seems that most individual Americans are opposed to it, but have been so completely disenfranchised by the political class that they can't do much about it... yet.

Re:But... but... (0)

Anonymous Coward | more than 5 years ago | (#27018367)

I'm sure the bankers who are praising the benefits of National Socialism introduced by the Bush administration are having a wonderful time with the taxpayer's (our) money. The next step is hyper-devaluation of the dollar and political instability. I am certainly glad that Obama has introduced controls on bank spending, is not white, not Austrian, and did not write a book about the 'Jewish problem'.
Oh! You don't think it could happen again? Wait until things get a little worse and the corrupt politicians and bankers are looking for a scapegoat to deflect their crimes upon. It'll be ignorant crackers in brown shirts marching in Munich all over again.

Re:But... but... (5, Insightful)

merreborn (853723) | more than 5 years ago | (#27017373)

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.

No, we got a much worse deal than communism.

Had this been a communist maneuver, "we the people" would now own these companies -- and that's something bank CEOs wouldn't stand for for one second. Instead, we got nothing in return for our money.

No, bank CEOs will never support communism. A true communist revolution would strip them of their wealth and their companies

Re:But... but... (0)

Anonymous Coward | more than 5 years ago | (#27017669)

Had this been a Socialist maneuver, "we the people" would now own these companies

There! fixed that for you. For it to have been a Communist maneuver "we the people" would first have strung up and gutted the aristocracy and danced around their corpses. THEN we would own their companies.

Re:But... but... (3, Informative)

maxume (22995) | more than 5 years ago | (#27017919)

You are mistaken. The government received senior bonds in exchange for the money. Today, Citigroup asked the government to convert those bonds to equity, and the government now owns 36% of Citigroup (under the bond structure, Citi had to pay the government interest; apparently, that was a problem, so they converted them to equity; hopefully they got a reasonable price).

It may end up that the government investment disappears, or it may turn a profit (I would guess that the government will recoup a significant percentage of the money), but it didn't disappear down some rabbit hole, it was in exchange for financial instruments obligating the banks to pay the government back.

Starting a new bank with a clean balance sheet probably would have been more effective, but they choose to bail out people who had deposited funds at existing banks (that's almost everybody...).

Sweden did this surprisingly well (1)

billstewart (78916) | more than 5 years ago | (#27018727)

Sweden had a smaller version of a banking crisis a few years back (90s, I think, or maybe early 00s.) They gave the banks more capital by having them issue stock which the government bought; it diluted the original shareholders' stock, and the government could have theoretically run the bank operations as a big stockholder, but once the banks recovered the government made a profit on the deal so the taxpayers actually got something back. I think it was around the timeframe that I was bumming around Scandinavia on vacation, and the Swedish currency was worth about 2/3 of what the Norwegian and Danish currencies were, but they got over it.

As to whether stocks or bonds in a distressed company are worth more, that's hard to say - both can lose pretty badly. And then there's the car companies - when they were asking for a bailout, the amount they wanted was something like 10x the market cap of all of GM's stock.

Re:But... but... (1, Insightful)

Tweenk (1274968) | more than 5 years ago | (#27018087)

Had this been a communist maneuver, "we the people" would now own these companies

Actual reality: the government would now own those companies. They would run them inefficiently, and only members of the ruling party could obtain its products without restriction - others would have to wait in kilometer-long lines and have government-issued coupons. The prices for the coupons on the black market would be several times the shelf price for the item. And even if you had coupons and money you would have to find a store which actually has the items, which would be impossible.

This would only strip the elite status from the capitalists to give it to the politicians, who in the end care about the companies (they don't belong to them but "to the people"). So instead of a greedy elite we would have a greedy, incompetent elite that is not bound by law.

Of course this doesn't fit e.g. China, but they are not really communist - they only pretend to. They are just an authoritarian regime with an ideology. However, the above description fits the former Soviet bloc countries.

Honest question (1)

ElMiguel (117685) | more than 5 years ago | (#27018863)

Of course this doesn't fit e.g. China, but they are not really communist - they only pretend to. They are just an authoritarian regime with an ideology. However, the above description fits the former Soviet bloc countries.

Why is it any more appropriate to define communism by what Soviet bloc countries did than by what China does?

The "buying distressed companies" part ... (1)

Ungrounded Lightning (62228) | more than 5 years ago | (#27017387)

... the government handed them $350 billion with no strings attached (which they promptly spent on ... buying distressed companies).

It's not clear that the "buying distressed companies" part is being done with bailout money.

As part of the same legislation, the government changed the tax rules. Now if a successful bank buys a failing bank it can use all of the losses of the failing bank to offset its profits for computing taxes. (IMHO that always should have been the case and the previous regulations to the contrary were an arbitrary distortion of the market.)

The failing banks' stock prices were so depressed that non-failing banks could buy them outright for less than the tax reduction of the merged company versus the original successful bank. So there was no issue with trying to evaluate the quality of the bank's assets (especially the mortgages). Any value at all was added profit. If the tax savings plus the residual asset value is greater than the cost of the merger there's no bailout money spent (though it might have been borrowed from other uses until tax settlement time).

Re:But... but... (1)

sgtrock (191182) | more than 5 years ago | (#27017597)

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).

Not every CEO has been whining to the Feds: [bizjournals.com]

While government leaders were well-intentioned in setting up the Troubled Asset Relief Program, it's a "lousy program," U.S. Bancorp CEO Richard Davis said at a business leaders forum Tuesday.

U.S. Bank was told, not asked, to participate in the program, which is a Darwinian attempt to "synthesize" weaker banks into stronger banks through consolidation, Davis said at the forum, held at Thrivent Financial for Lutherans in Minneapolis.

Re:But... but... (1)

iluvcapra (782887) | more than 5 years ago | (#27018297)

Several banks actively didn't want tarp money, can't find the link but BofA at the time also didn't want any part of it.

The problem is that if people saw that the government was handing money out to some people but not others, they could either reasonably conclude that the funded banks were near bankruptcy, which wasn't necessarily true, or that the unfunded banks were near bankruptcy, and that the government didn't want to sink money into them.

If they lay the money into all the large ones at once, the banks can still go down, but it won't be because the gov was picking a winner. It's a sorta crappy compromise, but I suspect that was the thinking-- at the time they didn't want to give the appearance they were playing favorites.

Notice also that Davis is careful to voice support the TARP program in principle, and lauds the intentions and seems to have been onboard with initial objectives, and just attacks implementation and policy drift... which is probably understandable, because the administration who started it and the administration currently running it are very very different.

Re:But... but... (1)

Bearel (817330) | more than 5 years ago | (#27018659)

When the govt tried to bail out Bear Stearns, the market reacted adversely causing a run which only exacerbated the problem. I think they were trying to avoid that happening again.

Re:But... but... (1)

mikeee (137160) | more than 5 years ago | (#27017653)

They didn't give them the money, they loaned them the money at 5% interest, escalating to 9% after three years, with the government having priority over equity holders in the event of a default.

And, in fact, they haven't spent that money at all; that's what Congress was flaming about in the hearing the other day. (Alutthough buying distressed companies would fulfull the purpose, assuming the buyer were strong enough...)

But maybe you haven't been paying attention, or are you just not letting a few facts keep you from getting a good hate on?

government bailout != communism (4, Informative)

jpate (1356395) | more than 5 years ago | (#27018207)

This is an important point that people don't seem to understand, probably because Marxist theory is not really taught except in specialist university level classes.

Here's the basic idea. Under Capitalism, business owners make a profit by paying their workers less than their labor is worth (so all profit is exploitation), and the business owners are able to do this because racism &c. divides the workers. Eventually, the exploitation of workers gets so bad that they develop a class consciousness on the basis of their economic status that trumps racial &c. divides, and they (forcefully) take power from the business owners. The final stage of Marxist communism is really a form of anarchy, where the means of production are owned by workers in a distributed fashion.

Agree with Communism or not, at least keep in mind that any top-down government aid paid for by workers to huge corporations is basically the opposite of Communism.

Communism != communism either (3, Insightful)

billstewart (78916) | more than 5 years ago | (#27018927)

Hey, don't you remember that "spam" has replaced "libertarians vs. socialists" as the default Internet discussion topic for the last decade? :-)

Marxism-Leninism doesn't actually work that way - the workers may get oppressed under capitalism, but they don't get around to developing the class consciousness that they're supposed to, so the elitist vanguard has to lead them in a revolution and stomp out the bourgeois classes. Since Marxism fails to recognize the value of creativity and risk-taking that entrepreneurs provide, that work doesn't get done after the revolution, so the economy recovers very slowly if at all from the damage done in the revolution, with idealist dogmatism as a poor replacement for the information provided by prices in a market, and the elites end up becoming the new class of bosses, not even the same as the old bosses, and the final stage of Marxist-Leninist communism is a chaotic transition to something like less competent capitalism.

Back in the early 90s, I was at economic conferences in Eastern Europe, and one of the fundamental issues that those societies were trying to solve was how to give the means of production to the workers before the ex-Communist bosses stole all the good stuff; in some cases the former state companies gave stock to the workers, but that didn't happen all that often, and usually only on businesses that weren't worth stealing.

On the other hand, the current top-down government aid paid to huge corporations is not only not either theoretical or real Communism, it's a great reminder that Ayn Rand's morally pure capitalists were more of a fictional device than a description of real capitalism. I don't think I agree with your assertion that the aid is getting paid for by "workers" - after all, we're taxing the "rich", and have been taxing businesses all along, and the bailout money's mostly getting borrowed, either from China or from Westerners who still have assets to invest in T-bills. Some of it will get paid back by your kids, and some of it will get defaulted on somehow, either by finding a way to restart inflation (which is a lot tougher in today's global economy than it was when Reagan did it) or by some new scam.

Microsoft-style version of the source code (1)

billstewart (78916) | more than 5 years ago | (#27018625)

Microsoft's real problem with Open Source is the language it's written in; if you translate it into a language they like better, they're not as concerned with the actual license. So here's a MS-friendly version of the code:

  • 10 LOCATE DUBIOUS ASSET
  • 20 SELL INSURANCE AGAINST DUBIOUS ASSET FAILING
  • 30 ...
  • 40 PROFIT!!!
  • 50 GOTO 10

Open source bankruptcy (1)

OeLeWaPpErKe (412765) | more than 5 years ago | (#27016461)

Great ! Now we can all go bankrupt the open source way ! Isn't open source grand ?

Re:Open source bankruptcy (1)

ShieldW0lf (601553) | more than 5 years ago | (#27016637)

I just clicked the "try our new beta index" link, and now I can't figure out how to revert back to the index that doesn't suck... anyone know how?

Re:Open source bankruptcy (1, Informative)

Anonymous Coward | more than 5 years ago | (#27017463)

"Help & Preferences" link (at the top), then "General" under "Index" on the "Your Preferences" side. There's a checkbox as the first item in the fake popup window.

Excel interface!?!? (4, Funny)

fuzzyfuzzyfungus (1223518) | more than 5 years ago | (#27016477)

I call upon my OSS brethren to join me in the working on the new fraudlib project and rebuild this package as a proper reusable library!

In theory... (0)

iluvcapra (782887) | more than 5 years ago | (#27016481)

You shouldn't need super-secret proprietary Ultra Code in order to price an issue, it just requires a market and the means to discover a price. Of course, that doesn't help if you're selling the cash-stream leg of the derivative to yourself, so you need a very sophisticated process to discover how much a 3rd person would pay if you weren't self-dealing, which you might not be doing as much of if your issue was an actual item of intrinsic value, and not little more than a side bet you invented to mollify CDO investors...

Am I getting anything wrong here?

Re:In theory... (1)

johnsonav (1098915) | more than 5 years ago | (#27016955)

You shouldn't need super-secret proprietary Ultra Code in order to price an issue, it just requires a market and the means to discover a price.

Exactly. The only reason anyone needs a model like this is because of the illiquidity and opacity of the CDS market.

Besides, I don't know why anyone would want to actually use this model to price anything. It hasn't proved very accurate.

well, the market also needs information (and time) (2, Insightful)

Trepidity (597) | more than 5 years ago | (#27017277)

What is a potential purchaser going to want to know before deciding how much to offer for a security? Well, something about its characteristics. If it's a derivative of other securities, they might want to know how its value relates to the values of underlying securities.

You first need to know the qualitative information of course: how does a change in the underlying securities result in a change in its price? What additional risk components (such as counterparty risk) does it have? Etc. Then the potential purchaser might want to a way to estimate how much they ought to pay for the derivative given some numbers for the values they place on risk, the inflation they expect, etc. That's what pricing models are. Unless you can actually work through all these interrelations in your head, you need some sort of model to even figure out what a reasonable offer for the security is.

Now maybe markets could also discover this through trial and error. Securities are valued in one way, and it turns out (as it recently did) that they were actually overvalued, because they failed to sufficiently factor in a significant component of risk. Refine for the next iteration. But this also requires infinite time to get it right, or at the very least a few major business cycles (i.e. decades). In this case, I'm not actually sure the market discovered a flaw in the previous pricing model per se, but rather in the parameters people were commonly plugging in: models generally have terms for estimates of underlying default rates, counterparty default rates, etc. and they were all massively underestimated (by the market).

Re:In theory... (0)

Anonymous Coward | more than 5 years ago | (#27017705)

Having downloaded and looked at the code, there's nothing particularly "super-secret" about it (the vast majority of it is the same exact code you'd use to price a government bond, or something similarly safe.)

The fact is that pricing even a very simple, safe asset is complex. Let's say you agree that you want to buy a 2 year non-callable, non-puttable bond from your municipality, with a 5% coupon.

You'd still need to know:
- when settlement is
- when it matures
- if the start date and settlement date are the same
- if I'm using standard convention on coupon payment (every 6 months)
- How many days are in my months (do I pretend that months all have 30 days, or do I use actual?)
- How many days are in my years (do I pretend that years have 360, 365 or the actual number of days?)
- If the bond matures on Feb 28, are your other coupons paid on the 28th, the 30th, or the last day of the month?
- If the first coupon period is not an even period, do I make a stub payment?
- If a payment falls on a weekend or holiday, do I pay before or after?
- Whose calendar am I using for holidays anyway?
- What is paid if there is a default?
- (and surely a few other things that I've forgot.)

And that doesn't even begin to address questions of interest rate risk, the time value of money, counterparty risk and other such things.

I don't deny that a CDS quote system would be useful, or that it would be incredibly useful to know what positions your counter-party held, and if they were actually capable of paying them. But even if you had that information, you'd still need a lot of legitimate math to make rational comparisons between investments.

So yes, you need the complex math. And a market would be very nice, but one cannot simply rely on the market to find prices, otherwise there will be nothing pressuring the prices towards their correct values.

Re:In theory... (1)

johnsonav (1098915) | more than 5 years ago | (#27017951)

And a market would be very nice, but one cannot simply rely on the market to find prices, otherwise there will be nothing pressuring the prices towards their correct values.

If the "correct" price of an asset isn't what the buyer and seller agree upon, then what is it?

Re:In theory... (0)

Anonymous Coward | more than 5 years ago | (#27018077)

If the "correct" price of an asset isn't what the buyer and seller agree upon, then what is it?

If both the buyer and the seller partners in an elaborate fraud where the asset is sliced, diced, repackaged and the ultimately sold for 10 times the orignial value, I would say the final price is incorrect!

Re:In theory... (1)

johnsonav (1098915) | more than 5 years ago | (#27018127)

If both the buyer and the seller partners in an elaborate fraud where the asset is sliced, diced, repackaged and the ultimately sold for 10 times the orignial value, I would say the final price is incorrect!

If both the buyer and the seller are parties to the "fraud", then who exactly are they defrauding?

Re:In theory... (1)

iluvcapra (782887) | more than 5 years ago | (#27018333)

In these transactions, the buyer and seller are both agents who are making transactions in fiduciary trust to the people they're managing the money for, e.g. The Investors. Those people are defrauded, because the buyer and seller have collaborated together to create an instrument that has all of the appearances of an Insurance contract, but in fact isn't.

Re:In theory... (1)

johnsonav (1098915) | more than 5 years ago | (#27018609)

In these transactions, the buyer and seller are both agents who are making transactions in fiduciary trust to the people they're managing the money for, e.g. The Investors.

Yes, that's certainly fraud. But, such fraud can only exist in the absence of a transparent and liquid market. The OP was arguing against the use of markets to determine prices, and for the use of complex models to determine the "correct" price.

My point was that determining a price by the use of models, instead of the actions of buyers and sellers on an open market, is what allowed this massive mis-pricing of assets to happen.

Re:In theory... (1)

aaarrrgggh (9205) | more than 5 years ago | (#27017717)

The proprietary protocols are for automated trading; you need an edge against others in determining value if you are trading something with volatility or dynamic valuation so you are able to get in and out at optimal prices and times. The 100-day EMA might be established by the "market", but the optimal price for a transaction is another story.

Turns out BSD wasn't dying (5, Funny)

Anonymous Coward | more than 5 years ago | (#27016545)

My 401k was.

Re:Turns out BSD wasn't dying (2, Funny)

stox (131684) | more than 5 years ago | (#27017039)

Heard on Wall Street:

I lost half my money, but I still have my wife.

Re:Turns out BSD wasn't dying (4, Funny)

BarryJacobsen (526926) | more than 5 years ago | (#27017389)

Heard on Wall Street:

I lost half my money, but I still have my wife.

Scratch that...quarter of my money.

Reason: Security (3, Insightful)

girlintraining (1395911) | more than 5 years ago | (#27016625)

Maybe financial institutions are catching on to the idea that open source provides a far greater degree of security, accountability, and maintainability than closed source? Just a thought. Because part of the reason why this situation arose is because of black-box money transfers that didn't have any oversight, and were largely automated. This way, financial institutions can get a far better picture of risk exposure -- and know that everyone else is doing the transactions in the same fashion. In short, everybody knows the rules of the game and who the teams are, unlike before where the rules weren't known until a referee called a foul.

Re:Reason: Security (1)

Prof.Phreak (584152) | more than 5 years ago | (#27017087)

It's not security. The models are b0rken. Badly. There's no good reason to release'em to the world other than to brag about being more open now than before (see, we're so open about our business now, we learned our lesson, please give us your money). Maybe even write off the model [well, labor expense] for tax purposes (donation to the world of open source!).

Internally, other models are being created that are less broken---those won't be made public as the whole point of modeling such things is to get an advantage over your competition (you can't let the world know how much you think stuff is worth).

Re:Reason: Security (1)

AvitarX (172628) | more than 5 years ago | (#27017847)

Companies don't write off donations to charity.

Well they do, but only in the sense that they get to write off every dollar they spend.

What a company call "income" is closer to what you or I would call "disposable income", or even savings.

They already got the tax break on that labor expense, weather they donate the product or not.

Re:Reason: Security (1)

Jurily (900488) | more than 5 years ago | (#27018565)

to get an advantage over your competition (you can't let the world know how much you think stuff is worth).

So banking is basically a big game of poker?

Re:Reason: Security (4, Insightful)

DragonWriter (970822) | more than 5 years ago | (#27017279)

Maybe financial institutions are catching on to the idea that open source provides a far greater degree of security, accountability, and maintainability than closed source?

Yeah, because the main problem with Credit Default Swaps is that the pricing code used internally in banks wasn't distributed under an open source license, not (among other things) that the distribution of risk of default away from those making lending decisions encouraged those making the lending decisions to commit and encourage others to commit frauds which made the inputs into any pricing model unreliable.

Pennies (2, Funny)

A. B3ttik (1344591) | more than 5 years ago | (#27016627)

So if the Credit Transaction Software is Open Source... anyone can modify it, right?

Let's change it. I've got this idea regarding fractions of a penny...

Re:Pennies (0)

FooAtWFU (699187) | more than 5 years ago | (#27016933)

You confuse open source in the general case with Wikipedia. Just because you can change it, doesn't mean anyone else will ever see it or care. :)

Re:Pennies (2, Funny)

Fastball (91927) | more than 5 years ago | (#27017091)

Yeah, but if caught you could end up going to federal POUND ME IN THE ASS prison...with Bernie Madoff as your bunk mate.

not open source (1)

circletimessquare (444983) | more than 5 years ago | (#27016633)

as traditionally understood: everyone owns it

its more like open source, as in the government, our representatives, literally own the source

along with every other financial institution and all of their intellectual property since they all went belly up

(the term "intellectual" property as applied to the product of financial analysts being used very loosely)

Re:not open source (1)

morgan_greywolf (835522) | more than 5 years ago | (#27016823)

as traditionally understood: everyone owns it

That's only for government-owned code. This code was originally written by JP Morgan and ownership was transferred at the end of last month to International Swaps and Derivatives Association, Inc., who open-sourced it, according to the first paragaph in TFA.

Grumble - "work" email address only (3, Informative)

tqft (619476) | more than 5 years ago | (#27016733)

Tried to download the source from www.cdsmodel.com (where the TFA) points you.

Wants an email address

"I Accept

Please keep me Informed about changes to the Standard Model:
Email Address:

"
If you choose not to be informed it asks for an address anyway.

If you add an email address - I used a gmail address - it asks for a work address. emailsucks@jpmorganblows.com now has a copy of the source.

Something is weird with that domain (1)

quinks (1172373) | more than 5 years ago | (#27016819)

If I go to www.cdsmodel.com [cdsmodel.com] , it works fine. If I go to www.cdsmodel.com. [www.cdsmodel.com] , which should be identical, I get to a completely different parked site. What the heck - this isn't supposed to happen. Then again, we're talking about the same people who use an Excel add-in within 5 miles of a billion dollar transaction, so go figure.

Re:Something is weird with that domain (1)

Sanat (702) | more than 5 years ago | (#27017131)

Check the source code in HTML

second url is listed as "http://www.cdsmodel.com./"

remove the period/dot after "com"

Re:Something is weird with that domain (2, Informative)

Timothy Brownawell (627747) | more than 5 years ago | (#27017577)

Check the source code in HTML

second url is listed as "http://www.cdsmodel.com./"

remove the period/dot after "com"

That's the entire point, the way DNS works all names actually end with a '.'. But because it's always there, it can be implicit. What probably happened is that somebody screwed up their domain-based virtual hosting somehow due to not understanding this.

Oh noes, not Excel! (1)

dave562 (969951) | more than 5 years ago | (#27016895)

One of the largest financial firms in the world is using Excel instead of Calc to manipulate their financial data. Damn Microsoft and their market dominance. We wouldn't be in the situation we're in if they had been using OSS and Calc!

Re:Oh noes, not Excel! (3, Informative)

ianare (1132971) | more than 5 years ago | (#27017253)

Everyone, without exception, uses excel in the banking world. A lot of backend stuff runs on OSS though. And the source code to the calculator is in C, and includes a Linux makefile.

I think I see the problem (0)

Anonymous Coward | more than 5 years ago | (#27017009)

The 'for' loop below should use less than, not less-than-or-equal. That caused everybody to have a Very Bad Day.

  *
  * ISDA CDS Standard Model
  *
  * Copyright (C) 2009 International Swaps and Derivatives Association, Inc.
  * Developed and supported in collaboration with Markit
  *
  * This program is free software: you can redistribute it and/or modify it
  * under the terms of the ISDA CDS Standard Model Public License.
  */

#include "cerror.h"
#include "convert.h"
#include "bastypes.h"
#include "date_sup.h"
#include "cmemory.h"
#include "badday.h"
#include "macros.h"
#include // This function converts a bad day to a good one (if it's in list).

TDate JpmcdsBad2GoodBadDayList(
      TBadDayList *bdl, /* (I) bad day list */
      TDate d) /* (I) bad date to convert */
{
      int i;

      if (bdl==NULL) /* allow NULL to ignore list */
      {
              return d;
      }

      for (i=0; icount; i++)
      {
              if (bdl->badDay[i]==d)
              {
                      return bdl->goodDay[i];
              }
      }
      return d;
}

Re:I think I see the problem (2, Funny)

Anonymous Coward | more than 5 years ago | (#27017351)

#include // This function converts a bad day to a good one (if it's in list).

I believe I have found their list :

std::string goodDayList = {"hookers", "cocaine", "bailout"};

Open does not make them any better (3, Interesting)

MazzThePianoman (996530) | more than 5 years ago | (#27017029)

CDSs, priced with open software or not, are the ticking time bomb of the world economy. Nothing better than bookie betting they have created an inflated payout of $50 trillion dollars worldwide that only takes the fall of a few big banks to start. I highly recommend listening this episode of "This American Life" which explains this situation and how it happened in terms just about anybody can understand. http://www.thislife.org/radio_episode.aspx?sched=1263 [thislife.org]

Re:Open does not make them any better (1)

iluvcapra (782887) | more than 5 years ago | (#27017189)

Also check out this movie [vimeo.com] that's been makng the rounds, very informative and makes everything quite clear.

Re:Open does not make them any better (1)

MazzThePianoman (996530) | more than 5 years ago | (#27017849)

Yes but it kind of upset me that it did not explain anything about CDSs except that they were sold on the securities created from the sub-prime mortgages.

What I find almost as absurd as CDSs themselves is the fact that the mainstream public and news is not really talking about them. Try searching CNN or FOX and you get almost nothing. Only 60 Minutes, NPR and some other more financial focused new outlets have made it known that the mortgage crisis is only one of my fuses of this bigger bomb. I do not even hear the politicians talking about it which scare me a lot.

Re:Open does not make them any better (3, Insightful)

93 Escort Wagon (326346) | more than 5 years ago | (#27017333)

CDSs, priced with open software or not, are the ticking time bomb of the world economy. Nothing better than bookie betting they have created an inflated payout of $50 trillion dollars worldwide that only takes the fall of a few big banks to start.

The lack of regulation surrounding CDS's is just nuts. As explained in that excellent TAL episode you linked to - the situation amounts to people gambling on the banks to fail, with "insurance policies" (what a CDS basically is) having been issued to the extent they amount to 10x the value of the assets being "insured". It's as if 9 other people bought fire insurance on your home, basically hoping for it to burn down.

The whole situation is just absurd - and it's world-wide to boot.

Re:Open does not make them any better (0)

Anonymous Coward | more than 5 years ago | (#27017609)

the situation amounts to people gambling on the banks to fail

That's why, if there's no existing regulations or laws that could be directly used to punish people that misused CDSes, I think the government should try charging people under anti-gambling laws.

Re:Open does not make them any better (0)

Anonymous Coward | more than 5 years ago | (#27017787)

It makes sense for bond-holders and other people expecting payments (e.g. a manufacturer working on a large order for a corporation) to take out insurance against the possibility that their debtor will default. Since often these creditors are part of the debtors' cash flow, the total notional size of the CDS market for a given corporation need not relate to its liquid assets. In essence, the buyers of CDSs replace the credit rating of the corporation in question with that of the CDS issuer.

Problems arise when, as now, there is a wholesale breakdown in the credit markets, causing large numbers of defaults. Then the credit of the issuer does actually come into question.

As with every other derivative, politicians and the media focus on speculators without considering the usefulness of the instruments as a hedge.

To put things in terms of your fire insurance example, what if I'm a contractor buying construction materials to put another level on your house next month? Wouldn't it make sense to insure against it burning down, leaving me stuck with the lumber, pipes, and wiring?

Re:Open does not make them any better (1)

dc29A (636871) | more than 5 years ago | (#27018045)

You seem to complain about the media's and politicians' problem with speculators, yet you forget that the vast majority of CDS contracts out in the wild are written for purely speculation purposes.

If an entity has invested X dollars into company Y, yes there should be some financial instrument available to this entity to protect its investment. I agree with you there. However, if entity X has 0 dollars invested in company Y, this entity shouldn't have the right to buy a financial instrument targeting company Y and protecting X from Y's default. That is gambling, not investing.

And problems don't really arise with a wholesale breakdown of a credit market, just one ore two big players failing will bring the entire house of cards to collapse.

- Speculator X buys CDS on company A while it has AAA rating.
- Speculator pays 2% premium to Lehman.
- Company A gets downgraded to AA-.
- Speculator X writes a CDS contract to Speculator Y at 4% premium (premiums rise when rating goes down). He nets a 2% profit. If A fails, Lehman pays him and he pays Speculator Y.
- Company A gets downgraded to BBB.
- Speculator Y writes a CDS at 8% to Speculator Z.
- Company A fails. Lehman has to pony up cash for speculator X. Ooops, unregulated derivative, they didn't have any money put aside. They go belly up. Opps Speculator X goes belly up. Ooops Y follows, then Z then the rest of the domino.

Replace X,Y and Z with Citi, BoA, Bear Stearns etc ... and you have the reason why we have the current financial clusterfuck. Unregulated derivatives abused by speculators.

Who you think is the biggest oil company on the planet? No, not BP, nor Exxon, nor any other oil company but JP Morgan Chase. Yes an investment bank. Oh and why do you think oil prices are in free fall despite major production cuts by OPEC? That's right, speculators have no more easy access to credit.

Every single speculator needs to be shot. Multiple times. In the head.

Re:Open does not make them any better (1)

themusicgod1 (241799) | more than 5 years ago | (#27018421)

Wait, you're saying that the price of oil going down (and hence, the amount of it used set to go up, as we no longer use it as even as responsibly as we were?) is a *good* thing!? If anything we should thank JPMorgan for doing the right thing and BUYing oil, keeping the price high, although not as high to consumers as its true cost.

Re:Open does not make them any better (1)

MazzThePianoman (996530) | more than 5 years ago | (#27018053)

But would they insure the whole house or just their materials and cost of the loss of work? Would they ensure a house they had no association with? Also when you get actual insurance the insurance company has to by law have at least a certain amount of backing to be able to make payout. The idea of insurance is good for explaining CDSs but the details make them fundamentally different than insurance.

The problem with CDSs is that it does not take a wholesale breakdown. Just the fall of one large bank can trigger multiple CDS payouts. This is because most places that bought CDSs also sold them. This weaving of CDS contracts bought and sold between large banks worldwide created a domino situation where when one fell the other could follow as the CDS payouts snowballed.

Allowing $50 trillion of payout on $5 trillion worth of interconnected stocks and securities is not useful, it is damn right foolish and is the root problem with the economy today.

Re:Open does not make them any better (1, Funny)

Anonymous Coward | more than 5 years ago | (#27017887)

It's as if 9 other people bought fire insurance on your home, basically hoping for it to burn down.

I don't see how that could possibily go wrong! Why it's almost as sound an idea as pitching an off-Broadway musical to multiple backers, selling over 400% total shares in the profits, and then pocketing the cash when the musical fails! All that is need is a subject matter practically everyone detests, therefore no one will pay money to see it! Hmm, perhaps something that focused on the early adult life of a hated facist dictator... Yes that would be perfect!

Re:Open does not make them any better (1)

93 Escort Wagon (326346) | more than 5 years ago | (#27018617)

I don't see how that could possibily go wrong! Why it's almost as sound an idea as pitching an off-Broadway musical to multiple backers, selling over 400% total shares in the profits, and then pocketing the cash when the musical fails! All that is need is a subject matter practically everyone detests, therefore no one will pay money to see it! Hmm, perhaps something that focused on the early adult life of a hated facist dictator... Yes that would be perfect!

Wow, now that you put it that way - it makes perfect sense! Sign me up!!

absolutely (1)

benjamindees (441808) | more than 5 years ago | (#27017683)

Legitimization of the CDS market is absolutely not a solution. As it is now, it is nothing more than fraud. But even with a clearing house, it is little more than unregulated insurance. Any bank or company stupid enough to have participated in it should have been sent to bankruptcy.

The same goes for the stock market, by the way. You idiots complaining that your 401k's have tanked, because your government encouraged you to invest in a derivative market of which 90% of people are completely ignorant, get what you deserve. We would all be better off if you invested in something more tangible.

That's right, I said stocks were derivatives. The value of a stock is dependent upon the first order derivative, or rate of change, of a company's assets. You are not buying a part of a company. You are betting that it's sales will go up.

Re:Open does not make them any better (1)

UnknowingFool (672806) | more than 5 years ago | (#27018121)

Also PBS' Frontline Inside the Meltdown [pbs.org] talks about the causes as well. A short summary: Everyone was speculating on housing. In the past, a bank were careful about mortgages. They had to very careful because they were responsible if the home owner defaulted. They may get the value back if they resold the home after foreclosure; but also they may not.

Then the house speculation of the late 90s and early 2000s happened. People were no longer holding onto homes until the mortgage was paid off. As home prices went up, people were buying and selling them quickly. Banks no longer as careful about the original lender as they sold the mortgages long before foreclosure happened. Banks were not only selling; they were buying mortgages as if they were stocks. In this scenario, everyone wins if the home gets resold at a higher price or equal price to the original loan.

Traditionally also lenders would get mortgages for only homes they could afford. If they couldn't afford it, the banks would not lend the money. But in the housing market, lenders were getting loans for far more than they could afford with the expectation of selling the home before they would get behind on payments.

Now banks aren't entirely stupid. To make sure that they didn't lose money if by chance their current lender defaulted, they would buy credit default swaps (paid every month). Credit Default Swaps are almost an insurance policy against foreclosure. If the lender forecloses, the institution issuing the CDS would pay the bank.

Unlike insurance however, a CDS is completely unregulated. The institution issuing the CDS did not have to be involved at all in any of the mortgages or banking. Joe's Deli could have issued a CDS if someone would buy it. Also there are no rules that say the issuing institution must have X% of the value of the CDS in real assets or what kind of assets the institution must have. The value of the CDS relied solely on the reputation of the issuing institution. Companies like Bear Stearns, AIG, and Lehman Brothers issued CDS and made billions in profits.

Again everyone made money as long as house prices went up. But booms only last so long. Then the housing market collapsed. Lenders were stuck with homes they couldn't afford and couldn't sell to recuperate. Banks were stuck with massive foreclosures. So they had to invoke their payments with CDS. But companies that issued CDS owed potentially hundreds billions if all the banks called for them. Some of them owed far more than their capital; those that didn't like Bear Stearns had capital but it was widely feared that they didn't. A company like Bear Stearns operates on perceived value as they are an investment house. When they perceived value collapsed; their real value does as well.

This is the litte formula (1)

EvilBudMan (588716) | more than 5 years ago | (#27017165)

That got us in this mess. Using math for social problems might not always be the best way to do things. It's just bookmaking, that's all.

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=3 [wired.com]

Re:This is the litte formula (3, Interesting)

xenocide2 (231786) | more than 5 years ago | (#27017367)

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.

CDS - NOT Bookmaking +1, Informative (0)

Anonymous Coward | more than 5 years ago | (#27017599)

Please, try NOT to emulate the senile economist and former presidential contender John McCain.

If Wall Street were run LIKE a casino, they WOULD NOT
lose money.

For bookmakers to profit, they must be fully hedged by trying to balance betting on both sides of a wager. This is done with the "spread".

Yours In Communism,
Kilgore Trout

Not a big deal (5, Informative)

snax (160434) | more than 5 years ago | (#27017211)

I work in this area, and this isn't really that big of a deal, regardless of the spin they put in the announcement.

This is about publishing a reference implementation of an already widely published model so that when party A does a particular calculation, related to a settlement amount for a particular trade, and party B does the same calculation, the values match.

Qualitatively, and to a large extent quantitatively, everybody on the street has been using the same model all along. The idea of publishing a reference implementation is meant to minimize conflicts in settling trades.

The accuracy of the valuation model here is not at the heart of any of the problems that AIG -- or any other firm, for that matter -- have experienced. That's more aligned with a simple lack of oversight on exposure.

Eyeballed the source code (3, Interesting)

benjfowler (239527) | more than 5 years ago | (#27017257)

The "JP Morgan" model is used by most people to generate credit yield curves, and then prince single-name credit default swaps.

I've worked on credit pricing code in my day job. So I was very curious to take a look at the source code, if only to see how the big boys code. I haven't gotten around to looking at the numbers it generates yet, but it's nice to know I can check my code against the standard implementation if I need to.

A peek at the source code is quite interesting. I've just had a chat with one of the finance wonks at work, and he reckons that much of the source comes from a library called ALib (which is a cheap, if somewhat proprietary financial analytics library), and they've just gone and renamed identifiers all over the source code -- you can tell where, because they haven't reindented the right hand side of the source code comments where they've made the changes....

I've been told that some banks are famous for writing rubbish code, but this looks like a pretty respectable effort. I could follow the example and library code fairly easily, which makes a refreshing change from my day job. Although they've got this really weird idiom with GOTOs all over the place, which in my years of C, have not managed to come across. I've been assured, however, that the original coders knew what they were doing.

From cds.c:

        if (fl == NULL)
                goto done;

        if (JpmcdsFeeLegPV (fl, today, stepinDate, valueDate, discCurve, spreadCurve, cleanPrice, pv) != SUCCESS)
                goto done;

        status = SUCCESS;

  done:
        if (status != SUCCESS)
                JpmcdsErrMsgFailure (routine);

Re:Eyeballed the source code (0)

Anonymous Coward | more than 5 years ago | (#27018243)

One of our guys from Microsoft uses this goto-like framework in any C project since it alleviates doing exhaustive error checking in the absence of an exception framework.

As long as you have a generic error-catching system in place, you can have a structure that looks like this:

ERROR_CODE_API function( ... )
{
ERROR_CODE_API err = 0;

TRY( my_function( value ) == expected_value );
TRY( my_function2( value ) == expected_value );
TRY( my_function3( value ) == expected_value );
TRY( my_functionN( value ) == expected_value );

finally:
  if( err != 0 )
  {
    /* Catch block */
  }

  return err;
}

It will scaffold well and allows errors to propagate back up the stack while ensuring cleanup where necessary.

More common implementation source code (1)

billstewart (78916) | more than 5 years ago | (#27018569)

  • 10 LOCATE DUBIOUS ASSET
  • 20 SELL INSURANCE AGAINST DUBIOUS ASSET FAILING
  • 30 ...
  • 40 PROFIT!!!
  • 50 GOTO 10

They need to sell these "toxic" assets (1)

Btrot69 (1479283) | more than 5 years ago | (#27018299)

The US Treasury Department's "TARP" economic recovery plan revolves around pricing and buying these so-called "toxic" assets. Presumably they need to create a market for them in order to price them. There can't be a market if no one knows how to price them. Hence -- JPMorgan releases their "super-secret" code. It would be interesting to compare JPMorgan's price model to Quantlib. (http://quantlib.org). I suspect that JPMorgan would be trying to inflate the price that they get for their CDSs !

Law Compilers (1)

Doc Ruby (173196) | more than 5 years ago | (#27018675)

CDS pricing is now a matter of Federal law, and will surely be evaluated with this software as the legal rules for enforcing pricing.

I hope this event marks a watershed in our progress towards making all truly formulaic and deterministic laws, or those portions of any laws, validated compilable software. The laws should specify the software's policies, against which claims of bugs should be argued. But the actual execution of the software should let anyone who wants anticipate how a court would rule that part of the law should be applied.

Too much lawyering and weasel words make too many badly written laws merely risks for the public. Even though the software will have bugs, the "bugs" in many current laws are much worse, and much harder to prove in any conclusive way.

If they had only done that sooner (2, Interesting)

Edmund Blackadder (559735) | more than 5 years ago | (#27018745)

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.

This is *NOT* a BSD like license (1)

Conficio (832978) | more than 5 years ago | (#27019035)

This does not look at all like a BSD like license. IANAL.

BSD says nothing about Licensing Derivative Work (2), Revision of License (7), Termination of License (9), or Patents (10), and many more.

it would be interesting to see if the Open Source Initiative [opensource.org] would accept this as an open license. In any case it is more license proliferation [opensource.org] .

Load More Comments
Slashdot Account

Need an Account?

Forgot your password?

Don't worry, we never post anything without your permission.

Submission Text Formatting Tips

We support a small subset of HTML, namely these tags:

  • b
  • i
  • p
  • br
  • a
  • ol
  • ul
  • li
  • dl
  • dt
  • dd
  • em
  • strong
  • tt
  • blockquote
  • div
  • quote
  • ecode

"ecode" can be used for code snippets, for example:

<ecode>    while(1) { do_something(); } </ecode>
Sign up for Slashdot Newsletters
Create a Slashdot Account

Loading...