Okay, let's look at those two transactions.


First, we have the securitized, default-protected bond basket. Do you just sit on this risk for three months, or do you try to lock in a hedge, and free up the reserve capital?


I can think of a variety of ways to hedge default risk, though probably none of them perfect. My more curious questions is, if you do hedge this default risk, are you alone? Do you have good visibility into how the counter-partying is spread around, how deep their reserves are, and what are the contingent cascades?


Are other banks "distorting" the price relationships by stealthfully seeking and picking off the same isolated offsets? Do you hope to hedge dynamically? Is the whole world leaning on a handful of investment banks who think the same thing?


Second hedge, the duration/cash-flow restructuring for the UK insurerer with the 6%-yield liability stream. First, I wonder why you didn't "go to them" sooner with a swap. But, given that you know their predicament, my bigger question is, how far in advance do you foresee their contingent distress, and do you begin constructing a replicating portfolio for the first basket in anticipation of being able to make the sale?


Meaning, suppose you know that if rates go down X%, there's an 80% chance you'll be able to sell them some type of yield-surfing package. When do you start selling it, when is the threshhold crossed that the free-money trick becomes worth the friction and sales hassle?


And if you do know that, if rates drop X%, it will probably create this stream of small cash flows, do you hedge that in some way, and recognize immediate profits (unreportable as such on a probable future sale? Or did someone else just happen to be in an opposite predicament (please describe and you only discovered both their existences late in the game?


How much visibility do you have into contingent sales opportunities, in the event markets rise and fall? Aren't equity underwriters natural short-sellers in Nasdaq 100 futures?


In another post I said,


***"So, rather than actually locating counter-parties, the focus shifts to hiring the most central dealer, with the most reliable proprietary decks of orders to lean on and bang against, and the lowest friction, to dynamically replicate as the market rises and falls. The illusion is that lower RELATIVE friction actually creates more counter-parties. BUT IN REALITY, LOWER RELATIVE FRICTION MERELY SHORT-CIRCUITS THE DISSEMINATION OF ACTUAL NEEDS.


So the sleight-of-hand is the relocation of decision-making and inventory-management capacity up hill to compensate for lower actual liquidity, which also creates the illusion of higher immediate liquidity as selling interest is kept off the market and out of the visible region where it could be priced in (like S&P futures sellers in 1987).


And again, why does shifting order and risk management to lower-friction operators conceal true supply-and-demand conditions? Because the time in advance an order will be 'exposed to the crowd,' and the distance from current prices, will be proprortional to the time it takes to place and cancel an order."***


So, do you create a buried contingency by taking unpriced short-term default risk in bonds out of the hands of natural counter-parties?


Oh, and for last, the obvious question:


"How do you convince someone who has been hustled many times before that you're different? There's a way to do this,"


Uhhhhh - can we, like, get these exclusive money-making secrets, the seminar tape, and the testimonials, by sending a money order to what PO Box??


Is it "How to bluff on the end, and make sure they fold every time!" by Mike Caro?


eLROY