(b)  Regulating the network  The first diagnosed case of Human Immuno-Deficiency Virus (HIV) in the United States came in June 1981. The first diagnosed case of HIV in Australia came in November 1982. In the early 1980s, rates of HIV and AIDS incidence in the US and Australia were roughly similar on a per capita basis. But from the mid-1980s onwards, things changed. By 1994, rates of incidence in the US were six times those in Australia. By 2003, the per capita prevalence of HIV in the US was ten times that in Australia. 29 What explains these differences? The short answer appears to be government policy. In the US, the policy stance since the early 1980s has been largely theological. The preventative response has taken the form of moralising about sexual abstinence and monogamy. Since the mid-1990s, the US government has invested in the less contentious areas of HIV/AIDS treatment. But as recently as 2007, the US administration remained opposed to the provision of condoms or needle and syringe programmes to prevent the spread of HIV/AIDS. Australian policy since the early 1980s has, by contrast, been grounded in biology rather than theology. It has been systematic, with policy evidence-based and preventative. Education and prophylactic measures have been widely available. But there have been targeted initiatives for high-risk groups – for example, sex workers and drug users – through subsidised needle and syringe exchanges and free condoms. The results of this programme are clear in the statistics.

BIS Review 53/2009  21  Table 3: Range of CDS Premia (bp) and Central Counterparties  Low uncertainty around counterparties' inter-linkages  High uncertainty around counterparties' inter-linkages  Probability of counterparties defaulting  Number of counterparties 1  2  10  50  1%  0  2  0  0  5%  0  10  2  0  10%  0  18  6  2  30%  0  42  44  43  1%  0  3  9  18  5%  0  14  39  60  10%  0  27  68  87  30%  0  63  127  136  Probability of reference entity defaulting = 10%; Loss given default rate = 50%;  Charts: Chart 1: Global Financial Network: 1985  22  BIS Review 53/2009  Chart 2: Global Financial Network: 1995  Chart 3: Global Financial Network: 2005  BIS Review 53/2009  23  Chart 4: CDS Premia and Network Uncertainty – Pre-crisis  Chart 5: CDS Premia and Network Uncertainty – Post-crisis  bps 500 Size of range of CDS prem ia  S ize of range of CDS prem ia  bps 500 400 300 200 100 0 50  400 300 200 100 0 50  40  0.5 30  0.4  20 Number of counterparties  10 0  40  0.5 30  0.3 0.2 0.1 0 Default probability of reference entity (p)  0.4  20 Number of counterparties 10 0  0.3 0.2 0.1 0 Default probability of reference entity (p)  Chart 6: Financial Contract Design  CDO  FINANCIAL ECONOMY  ABCP Senior ABS/CDO tranches  Senior AAA  (and bank debt/ capital)  Capital Notes  CDO2 Senior Mezzanine Equity  CDO mezzanine tranches  Mezzanine tranche Equity  Principal protected notes  CDO equity tranches  Leveraged loans  Mezz/second lien debt HY bonds  MTNs  Corporate assets  Mezzanine Equity HY bonds  CDO of ABS  HEL ABS/CMBS  Senior Senior  CPPI on CDO equity  24  Leveraged loans  LBO’d company  REAL ECONOMY  SIV  BBB- rated HEL ABS/ CMBS or synthetic  Sub-prime mortgages/ Mezzanine Commercia (often BBB-) l mortgages  Mezzanine Equity Equity  BIS Review 53/2009  Chart 7: Weighted-average Cumulative Total Returns Large Complex Financial Institutions Banks excl.