Category Archives: derivatives

Will Berkshire Lose its Triple-A?

Posted on November 19, 2008 by Felix

On the face of it, recent activity in Berkshire Hathaway makes little sense. Credit default swaps on the triple-A company were trading at 388bp yesterday, and are somewhere over 450bp today, possibly having risen as far as 560bp this morning. … Continue reading →

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Why AIG was in the CDS Business

Posted on November 14, 2008 by Felix

Gari has a question about AIG, in the comments: Why did a well-capitalised insurance company with plenty of long-dated liabilities decide that it was a better use of shareholders’ and policyholders’ cash to write protection against debt instruments rather than … Continue reading →

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Why Buying Default Protection Isn’t Naked Shorting

Posted on November 11, 2008 by Felix

Commenter "cds_till_i_die" asks: Can you explain to me the conceptual differences(if there are any) between buying CDS protection on a bond you don’t own and naked short selling…I think I get it but some clarification would be useful. Happy to … Continue reading →

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CDS: An IM Exchange

Posted on November 8, 2008 by Felix

Many thanks to Robert Waldmann, who allowed himself to be roped into an IM conversation with me about the CDS market, after he left a couple of skeptical comments on the subject here and at Kevin Drum’s. Here, then, is … Continue reading →

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Icelandic CDS Datapoints of the Day

Posted on November 7, 2008 by Felix

The CDS auctions for Iceland’s failed banks are all over now, and the results are up at creditfixings.com. Bank Inside Market Midpoint Open interest Final price Landsbanki senior 3.375 €454 million to sell 1.25 Landsbanki subordinated 1.375 €63 million to … Continue reading →

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The Downside of CDS Demonization

Posted on November 6, 2008 by Felix

Add Kevin Drum to those who think that a bit of CDS demonization is not such a bad thing at all. Unfortunately, he’s a bit shaky on the facts: It’s a little hard to get a handle on an exact … Continue reading →

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CDS Didn’t Bring Down Bear and Lehman

Posted on November 5, 2008 by Felix

I’m thinking I should institute some kind of CDS Demonization Watch: this meme is only going to grow and grow. And it’s spreading, too, into the wonkier areas of the financial press — people and publications on the ought-to-know-better list, … Continue reading →

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Exchange-Traded Derivatives: Why Stop at CDS?

Posted on November 3, 2008 by Felix

Donna Block has an overview of all the different groups jockeying to set up a CDS exchange: Businesses trying to establish the new market include CME Group Inc.; NYSE Euronext Inc.; IntercontinentalExchange Inc. or ICE; Eurex, the derivatives arm of … Continue reading →

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How AIG Failed

Posted on November 3, 2008 by Felix

The WSJ shines a bit more light on what went wrong at AIG today, with a story centering on the chap who designed its risk models, Gary Gorton. In a nutshell, anybody writing credit protection runs two risks: the default … Continue reading →

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Chart of the Day: The Russia-Brazil Spread

Posted on October 30, 2008 by Felix

After writing about my BRIC decoupling thesis, I asked the friendly chaps at Markit if they could share with me the 5-year CDS spreads for the four countries in question. It turns out that India isn’t really much of a … Continue reading →

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When Banks Stop Underwriting

Posted on October 30, 2008 by Felix

Citigroup and Credit Suisse are so damaged by the financial crisis, it seems, that they’ve given up underwriting loans to their biggest and most valuable corporate clients, including Nestle and Nokia. Instead, they’re linking those loans to the companies’ CDS … Continue reading →

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CDS: The Less You Know, The Worse They Look

Posted on October 29, 2008 by Felix

For those of you who like your CDS exposés presented in the mellow tones of Leonard Lopate and Jesse Eisinger over the course of a leisurely half-hour, here you go. This is a sober public radio progam, not a finger-pointing … Continue reading →

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Credit Market Datapoint of the Day, AIG Edition

Posted on October 25, 2008 by Felix

What was that about the credit markets improving? Not so fast: American International Group Inc. has used $90.3 billion of a U.S. government credit line since it was bailed out last month… AIG’s latest balance was revealed yesterday by the … Continue reading →

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Idiotic CDS Proposal of the Day, Ben Stein Edition

Posted on October 22, 2008 by Felix

On Sunday, I was quite rude about Karen Shaw Petrou, who thinks it would be a good idea to ban all CDS trading in the future: I explained that total CDS losses would skyrocket as a result, since no one … Continue reading →

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Annals of Counterparty Risk, Tim Backshall Edition

Posted on October 21, 2008 by Felix

Remember this? It’s Friday, March 14, and hedge fund adviser Tim Backshall is trying to stave off panic… Bear Stearns Cos. shares have plunged 50 percent since trading began today, and his fund manager clients, some of whom have their … Continue reading →

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Why the CDS Market Didn’t Fail

Posted on October 19, 2008 by Felix

Jane Baird has the latest on what Alea calls "the non-event of the year": the Lehman Brothers CDS settlement on Tuesday. The upshot is that there’s very little to worry about: the worst-case scenario is limited to the failure of … Continue reading →

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The Unreassurable Markets

Posted on October 15, 2008 by Felix

Megan Barnett has a good question: how come investment banks’ CDS spreads are widening, even in the face of an all-but-explicit government guarantee that they won’t be allowed to fail? The easy answer is that the markets are panicking. Boy … Continue reading →

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Annals of Regulatory Arbitrage, German Structured Products Division

Posted on October 15, 2008 by Felix

What is it about German banks selling credit derivatives to their retail customers? Back in 2000 I wrote about a scandal involving Dresdner bank and many others, who used credit derivatives to transform Ecuadorean PDI bonds (dollar denominated, coupon 3.5%, … Continue reading →

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Investor Notes: BRICs and Credit Default Swaps

Posted on October 14, 2008 by Felix

A couple of notes from the lunch I went to this afternoon put on by Natixis Asset Management: •Ron Holt of Hansberger Global Investors passed along a provocative datapoint: that the total market capitalization of all Russia’s oil companies is … Continue reading →

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Lehman CDS Datapoint of the Day

Posted on October 12, 2008 by Felix

The DTCC is a reliable source, and it says the Lehman CDS settlement flows on October 21 are going to be small: In November 2006, The Depository Trust and Clearing Corporation (DTCC) established its automated Trade Information Warehouse as the … Continue reading →

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Lehman CDS: Low Price, Low Volume

Posted on October 10, 2008 by Felix

So, how did that Lehman CDS auction go? On the face of it, not well: the initial recovery price is just 9.75 cents on the dollar. But if you were expecting 86 cents of losses based on a 14-cent recovery, … Continue reading →

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Lehman CDS: It Won’t Be Over Today

Posted on October 10, 2008 by Felix

Vipal Monga today mentions something I was unaware of: the Lehman CDS auction today is not the end of the story when it comes to settling those trades. All it does is set the price: settlement doesn’t happen until October … Continue reading →

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Did Derivatives Cause the Crisis?

Posted on October 9, 2008 by Felix

While I’m reading the front page of the NYT, it’s worth noting the latest installment in its crisis series: 3,000 words from Peter Goodman on how Alan Greenspan’s lax oversight of the derivatives market got us all into this mess … Continue reading →

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Awaiting the Lehman CDS Auction

Posted on October 7, 2008 by Felix

Here’s an interesting theory: the reason that bank lending has ground to a halt is that everybody’s waiting until the results of the Lehman CDS auction, which is currently scheduled for October 10. "Banks are hoarding cash," says Elizabeth MacDonald, … Continue reading →

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Topsy-Turvy Datapoint of the Day, Fannie Mae CDS Edition

Posted on October 6, 2008 by Felix

Reuters reports on the results of the Frannie CDS auction: Protection sellers on the companies’ subordinated debt were the biggest winners, with contracts on Fannie Mae’s subordinated debt recovering 99.9 percent of the sum insured… Credit default swaps on the … Continue reading →

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