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Industry Open-Sources Model For Infamous CDS
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."
Not sure if a direct link will work:
http://www.markit.com/information/cds-model/download/contentParagraphs/00/document/isda_cds_model_c_v1.7.zip
http://www.markit.com/information/cds-model/download/contentParagraphs/01/document/cds.xll (excel)
http://www.cdsmodel.com/
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!
My 401k was.
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.
#fuckbeta #iamslashdot #dicemustdie
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.
The Singularity is closer than you think
Quant
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.
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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
"They who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety" Franklin
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.
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.
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);
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.
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Open Source Sysadmin
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
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...).
Nerd rage is the funniest rage.
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.
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.
Bill Stewart
New Fast-Compression-only CPR http://preview.tinyurl.com/dy575ks
...richie - It is a good day to code.