You can transfer credit risk, but you cannot hedge it.

Because, unlike market (price) risk, which is anonymous, credit risk is associated to a particular counterparty.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

You can pool it, and you can subdivide the pool. But you cannot make the risk go away.

In some jurisdictions you can take it off balance sheet, but that doesn't make it go away.

Or you can sell it, but then the buyer is exposed to the full credit risk as if they had originated the loan.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

But you can actually outsource the credit risk to someone else. Thah's just what the big Wall Street banks did when they sliced and diced all those toxic mortages, repackaged and sold them on to Düsseldorf and all the others.

Yes and no. You can sell it, obviously, but you can't outsource it in any meaningful sense. At most, you can buy CDS on your credit risk, but this does not hedge your credit risk - it merely substitutes one credit risk for another.

- Jake

Friends come and go. Enemies accumulate.