CDS For Doomers, Politicians, And The Media

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Fri, 06/17/2011 - 19:08 | 1378997 topcallingtroll
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Since all the major credit rating agencies are compromised and Dagong is not reliable nor quantitative enough, then CDS and other derivatives such as options are the best way to get a read on the current risk level of a loan.

Sure they are fine one day and not fine the next, just like ratings from agencies, but if you watch the trend, it is much more accurate and timely than "credit watch negative" from a doofus agency.

Watching the options is not a great way to get a read on credit, but it is better than any other way., such as lying sacks of shit like Juncker and Trichet

Fri, 06/17/2011 - 20:01 | 1379095 iNull
iNull's picture

Depends what kind of options. When too many people try to game near-term options the market usually burns them down. I know. I've tried a few times and learned the hard way. Deep options is another story.

Sat, 06/18/2011 - 12:35 | 1380251 Kayman
Kayman's picture

CDS is selling insurance without reserves.

When Goldman enlists Hank Paulson to have the American Taxpayer make a bad bet with AIG whole, to the tune of  $13 billion, then it is entirely a fraudulent enterprise.        


Fri, 06/17/2011 - 18:57 | 1378999 JimRogers
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after the second logical error i gave up... 


happy happy hour td.

Fri, 06/17/2011 - 19:08 | 1379018 buzzsaw99
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write, right, meh

Fri, 06/17/2011 - 19:06 | 1379001 Ecoman11
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I think I've heard enough and ready to move to

Fri, 06/17/2011 - 19:09 | 1379009 topcallingtroll
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Tyler is the canary in the coal mine.  Best to stay here.


He faints a lot, but one of these days it might be for real.

Fri, 06/17/2011 - 20:02 | 1379090 iNull
iNull's picture

That and Ruppert is smoking way too much weed up in Sebastopol with the patchoulli-tie-dyed crunchies. Late rent or not, Culver City was at least keeping it real for him.

Sat, 06/18/2011 - 08:58 | 1379967 centerline
centerline's picture

LOL.  That was funny.

Will be right here until the internet goes down... or I can't afford it anymore... or men in black SUVs show up at all ZH'er houses and take us to the special re-education facilities.

Fri, 06/17/2011 - 19:08 | 1379004 Medea
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Forever Ponzi.

Fri, 06/17/2011 - 19:40 | 1379059 Long-John-Silver
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Pandora, Ponzi, and Nuclear. Once let out of the box there is no putting them back in. 

Fri, 06/17/2011 - 19:05 | 1379008 Lord Welligton
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@ Peter Tchir

"As of June 10th the Gross Notional of Hellenic Republic CDS outstanding was $79 billion and the Net Notional was $5 billion."

Can you provide evidnce for that?


Fri, 06/17/2011 - 19:10 | 1379010 TooBearish
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Quite good , bravo

Fri, 06/17/2011 - 19:11 | 1379015 Lord Welligton
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@ Peter Tchir

"This is a bit tricky.  For the average investor there is limited price transparency, but for the people in the market there is a high degree of price transparency."

Can you provide evidence for that?

Fri, 06/17/2011 - 19:14 | 1379022 Lord Welligton
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@ Peter Tchir

"CDS contracts have value prior to a Credit Event and trade regularly and have a mark to market value."

Can you provide evidence for that?

Fri, 06/17/2011 - 19:30 | 1379025 Noah Vail
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About the only thing that the doom and gloom crowd,


Uh, Tyler, ya think that doesn't include you? I mean, really, that was quite the intro.


Whoops, I'm sorry, I see you're not the author,well, allow me to continue.


I am not here to defend CDS as a product, but to try and shed light on the subject so that people don’t react to inaccuracies that cause them to make decisions based on incorrect information.


Yes, and I am from Goldman Sacks and am doing God's work because, God forbid, you should ever attempt to think for yourself. NEVER invest without the advice of an expert like me, an honest to God CFA.

Fri, 06/17/2011 - 19:16 | 1379029 Lord Welligton
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@ Peter Tchir

"There still seems to be so much talk about how a Credit Event on one name could have a ripple effect causing counterparties to fail on their obligations.  I think this risk is severely overblown."

Can you provide evidence for that?


Fri, 06/17/2011 - 19:36 | 1379055 Noah Vail
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Did AIG think it was overblown, also? Or Lehman?

Fri, 06/17/2011 - 19:48 | 1379074 Lord Welligton
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Now now.

But you know they valued everything for what it was worth.

Just because everyone else thought it was worth less didn't make their Auditors wrong.

It just made them greedy.

Nice fees if you can get them.

Fri, 06/17/2011 - 20:10 | 1379138 buzzsaw99
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there will be no daisy chain black swan total meltdown in the financial markets with turbo timmy and ben bernanke backing everything deemed a threat to tbtf bond holders, and i mean everything big is backed by unlimited currency. the evidence is incontrovertible. AIG is a perfect example. There could be ten more AIGs tomorrow and the fed would buy them all. They want to destroy the usa dollar, they want huge fees and bank bonuses. I do not understand your doubt.

Fri, 06/17/2011 - 20:19 | 1379174 Lord Welligton
Lord Welligton's picture

Well quite.

But is it not time to call a spade a spade.

And just get to hell on with it.

Create €2,000,000,000,000 now and move on.

Why wait?

Fri, 06/17/2011 - 21:02 | 1379281 buzzsaw99
buzzsaw99's picture

Easy money for them, hard cheese for everyone else.

Fri, 06/17/2011 - 19:22 | 1379036 Lord Welligton
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@ Peter Tchir

"This is a bit tricky.  For the average investor there is limited price transparency, but for the people in the market there is a high degree of price transparency. "

"Some effort could be made to make the market more transparent, but the same could be said for the corporate bond market."

There is a "high degree of transparency" BUT "Some effort could be made to make the market more transparent"

You are a dickhead.

What is the Gross value of Greek CDS.



Fri, 06/17/2011 - 19:23 | 1379041 Noah Vail
Noah Vail's picture

More advice from the recently renamed stock brokers.

So buy a bridge already.


Tyler, I hope you're just funnin' us with this kinda stuff.

Fri, 06/17/2011 - 19:28 | 1379049 Dapper Dan
Dapper Dan's picture

Tyler, how about an open forum soon?  The last couple of weeks have been grueling. We need time to blow off steam, vent if you will.

Fri, 06/17/2011 - 19:43 | 1379069 iNull
iNull's picture

It already is an open forum for the most part. One where posters turn any of the topics de jour into their personal hobby horse, be it NWO, immigration, or precious metals. People largely ignore the subject and talk about whatever they want.

Fri, 06/17/2011 - 19:33 | 1379050 Lord Welligton
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"The notional dollar value of Greek CDS contracts was last at $76.351 billion. The value has doubled since mid-2009 to more than $85 billion in early April. GRGVCDSV=DT"

"As of June 10th the Gross Notional of Hellenic Republic CDS outstanding was $79 billion and the Net Notional was $5 billion."

Only six billion so far but what's six billion amongst friends.


"- Data from the Depository Trust and Clearing Corporation (DTCC) shows that as of April 22 there were 826,029 outstanding euro-denominated CDS contracts with a gross notional value equivalent to $8.322 trillion. TOTEURCDSV=DT


- The value of the euro-denominated CDS market is less than that of the U.S. dollar market ($15.58 trillion)."


Let's make that trillion.



Fri, 06/17/2011 - 19:42 | 1379067 Noah Vail
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You left out this little beauty,

- "Any restructuring that did not affect all holders of the debt would not constitute such a credit event, lawyers say."

Emphasis on LAWYERS SAY.

Which is to say that they can default on some but not others without triggering any default? Horsefeathers. The propa is really getting deep.

Fri, 06/17/2011 - 19:47 | 1379081 Lord Welligton
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This is not the Great Recession.

It is the Great Unwind.

Only certain "playas" get fucked.

Fri, 06/17/2011 - 22:27 | 1379420 XPolemic
XPolemic's picture

Only certain "playas" get fucked.

They are still negotiating which ones that will be, hence the delay.

Sat, 06/18/2011 - 09:08 | 1379971 centerline
centerline's picture

+1.  There is no "cohesive" group of NWO a-holes with a set plan.  There are all sorts of a-holes and groups of a-holes, mostly making this crap up as they go at this point.  The elite will canabalize themselves the same as they will us, and we will ourselves.  Just a matter of time.  Big players with high stakes making.

Sun, 06/19/2011 - 07:09 | 1382147 XPolemic
XPolemic's picture

Yep, just lots of different players with lots of different agendas. It's like 10 best friends get stranded on a deserted island with no food. Sooner or later, things aren't so friendly.


Sun, 06/26/2011 - 22:41 | 1404480 forexskin
forexskin's picture

always nice when someone steps way back for a peek at the big picture.

if one of the 10 on the island is a banker, at least the others will not be the last to starve.

The daisy chain failure of counterparty after counterparty sounds exciting, but I think that risk is well managed, and to the extent one of the dealers gets in trouble again, the remaining dealers will work around it.

this is the fundamental assumption, with the greatest consequences in failure. complex system with non-linear dynamics. so DTCC is a know all, tell all CDS market, and will alway be there to clear? (until someone figures out how to game it). choosing to remain sceptical.

Fri, 06/17/2011 - 19:36 | 1379054 harveywalbinger
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Lots of interesting discussion of the DTCC here:

Fri, 06/17/2011 - 19:38 | 1379063 gwar5
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Thanks for the paper on the dark paper markets. But I can't dance to it so I only give it a 5.  

While CDSs may be fine for normal markets, not so sure it's worth much in times of great upheaval and monetary paradigm shift.

In the LTCM meltdown, among other things, it also came to light that LTCM had oversold to more counterparties than could be redeemed. And LTCM was at the top of the food chain. So, no, they're not managing their risk well and more proof is that the peddlers resolutely refuse any transparency and regulation which means they're still at it. This is the Fraud that Greenspan told Brooksley Born to ignore  --- just months before the LTCM problem.

When counterparty A defaults on counterparty  B, then counterparty B can't pay counterparty C either. All that mark to market debt will become worthless and who is to say anyone will even be accepting USD at that point anyway? That's just one more counterparty risk because it's built on underlying bad loans to a broke country.



Fri, 06/17/2011 - 19:45 | 1379066 mcarthur
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Thanks for this.  The ability for CDS to spread grief around the world seems to have dawned on the ECB et. al. but not 99% of the population.

Fri, 06/17/2011 - 19:47 | 1379072 prophet_banker
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  i call this a lie,  -"The DTCC started settling CDS trades. " as in all?; and yet it goes on to claim any CDS traded outside of DTCC aren't real just because they are off of the balance sheet......this article failed to see how naked shorts use CDS for that which they don't own, "place a bet"`- and the bond raiders profit on the way up and down

Fri, 06/17/2011 - 20:28 | 1379223 oogs66
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all CDS is off balance sheet, almost all CDS trades are captured by DTCC, there are few if any CDS trades done now that don't go through DTCC so the DTCC data is a very good assessment of the risk outstanding on any given reference entity


do you need to own a stock to buy a put?  if CDS should be banned because it places a bet, then shouldn't all options on anything be banned unless you own the underlying?  shouldn't short selling be banned altogether?  people need to get over the hype of CDS if they are going to avoid making dumb decisions.  buying a put in apple is different than buying CDS on AAPL in which way?  other than the put is more likely to pay off :)

Fri, 06/17/2011 - 22:53 | 1379490 ZeroPower
ZeroPower's picture

almost all CDS trades are captured by DTCC, 

Not totally accurate, plenty of CDSs on sovereigns (think CEE/CIS) never go anywhere near the DTCC system.

We're in agreement on CDSs in general however.

Fri, 06/17/2011 - 19:49 | 1379077 tgatliff
tgatliff's picture

Let me guess...  Mr. Peter Chachachia trades derivatives for a living, and is unhappy about their possible demise.  Let me shed some light as well...

1) CDS (as well as pretty much all unregulated derivatives) contracts are legalized Fraud, and have effectively blackmail the entire financial system.  

2) They are not "complex".  Having too much fraudulent activity going does not make them complex...  

Fri, 06/17/2011 - 19:49 | 1379084 Lord Welligton
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They are not at all complex.

They should be consigned to Las Vegas where they belong.

Sat, 06/18/2011 - 12:50 | 1380273 Kayman
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They should be consigned to Las Vegas where they belong.


But in Vegas, if you beat the dealer, the dealer can't call on Hank.

Fri, 06/17/2011 - 20:07 | 1379123 CrashisOptimistic
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I have suggested from day one that the issue is all about the swaps.

The gross notional is opaque.  The net notionals don't have to be all that meaningful, and there is no european regulation requiring DTCC notification of contracts, though most do.

It's all about the swaps.  There is no way in hell Merkel would cut her own political throat like this had not her banks terrorized her into ensuring they get taxpayer money flowed to them, using Greece as the conduit.

There are two truths to understand here:

1) The politicians and Brussels bureaucrats have one and only one motivation -- the EU (and their consequent benefit/pension packages) must remain intact.  So ANYTHING will be done to make that so.  Money can be printed, politicians can be assasinated, taxes can be looted . . . ANYTHING will be done to keep the juggled balls in the air.

2) NOTHING, absolutely nothing, will change about all this until and unless bullets go through skulls into brains.  People walking in the street are laughable.  General strikes are laughable.  Only snipers on rooftops will change anything.

Sat, 06/18/2011 - 03:15 | 1379773 Reptil
Reptil's picture

+1 on your points, an tgatliff's.


Fri, 06/17/2011 - 20:40 | 1379176 tom a taxpayer
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Thank you, tgatliff, for cutting thru the BS, and speaking truth to power. The CDS were a key part of the 2008 financial crisis that still inflicts high unemployment, foreclosures, depreciated pensions, rape of taxpayers, etc. Congress and the executive branch and the State and Federal prosecutors have done next to nothing about the flagrant fraud...the daylight robbery and financial armageddon of CDSs.


Fri, 06/17/2011 - 22:55 | 1379495 ZeroPower
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Thanks for trolling and adding exactly zero to the conversation at hand.

Fri, 06/17/2011 - 19:54 | 1379088 XPolemic
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I may have more faith than most people that the banks are managing their counterparty exposure to end users well, but my experience is that they have, and there is relatively little evidence pointing to banks having big losses due to mismanaging their end user counterparty credit exposure.

My questions to Peter Tchir after reading the above are these:

Have you ever worked in Risk Management for a Tier 1 bank?

Do you know how counterparty loss-given-default is calculated?

Have you seen a pricing model for credit instruments that uses something other than the "mean time to default" (i.e. the credit rating) for credit event probability in their Monte Carlo simulations?

Do you know if Risk Management perform their own due diligence on counterparties to determine issuer risk on the paper they issue, or simply rely on the credit rating agencies?

Credit Default Swaps are a type of re-insurance. You pass off some of your issuer risk to the re-insurer and pay the premium. If you believe that the premium offered is lower than your internally calculated issuer risk, then you have found an arbitrage opportunity (*cough* Goldman AIG *cough*).

The problem then is, how to manage the issuer risk on the re-insurer, who has obviously mispriced the risk and is due for a gutting? Why, the Federal Government of course! You can count on the good old government as a reinsurer of last resort.

The point most people miss about Credit Default Swaps is that they were initially created as a way to hedge your exposure to investments in emerging markets. Say you want to invest in a Brazillian ethanol producer, buy their bonds for example. The problem is, you know nothing about Brazil, and it's far away and difficult to oversee your investment. That is, it's difficult to price and manage the issuer risk.

What you do know however, is a reliable bank in Brazil, who knows the market, knows the ethanol producer, and can price the issuer risk on your bonds. This same bank has exactly the same problem as you. It wants to manage it's risk on it's investments in the US, a risk that you can price. So you get together, price each issuer risk and swap risks: ergo Credit Default Swap. The difference in risk premium is either settled immediately or on an ongoing basis like a coupon.

Sadly, the best laid plans of any derivative instrument are oft to go awry, and the CDS morphed into a massive blood sucking arbitrage vehicle on those market participants who had no idea how to price the risk on the insurance they were selling.

Fri, 06/17/2011 - 20:22 | 1379191 oogs66
oogs66's picture

I think they were originally created to hedge the exposure big derivative houses had to japanese banks.  the japanese banks all had the same trades on and all owed the u.s. banks huge amounts on a mark to market basis and the japanese banks were having credit problems on top of it, so a big part of the reason CDS was created was to hedge japanese bank exposure and then as a way to get regulatory capital relief on all their revolver commitments, back when even big money center banks did lots of revolvers.  EM was not a primary motivator behind the birth of CDS as far as I know.

Fri, 06/17/2011 - 21:00 | 1379277 XPolemic
XPolemic's picture

I am not in the US. In my country, CDS were initially a way of managing exposures to EM. Probably because my country is heavily exposed to those markets. Thank you for your correction on the birth of CDS, I will research more thoroughly. Always learning, always learning.

Heres the thing though: If your MTM counterparty exposure has breached your credit limit, and you think they might default, then you incorrectly calculated your counterparty risk.

If the way to hedge your counterparty risk is to buy insurance against default by creating a new instrument (CDS), then one has to ask who on earth would take the other side of that bet for a premium that was lower than the actual exposure? It either implies that the exposure of the big derivative houses was opaque, or that the people taking those exposures knew something about the credit problems, or a BoJ intervention, and made some free money. Or to put it another way, either the derivative houses got a discount on their risk, or someone else made some free money based on their 'local knowledge'.

The question is, why would you need to create a new credit risk instrument for US and Japanese financial markets when there are already well established risk markets, with deep liquidity, that will take the other side of any position you desire for a price, unless you think that your new instrument will give you a discount on hedging your risk by obscuring it's true exposure. In other words, are CDS an elaborate fraud?


Sat, 06/18/2011 - 09:20 | 1379981 centerline
centerline's picture

The short answer is that it appears so.  "Risk management" is the key phrase here in my opinion.  Although it almost needs to be redefined for purposes of explaining what went wrong in the last banker bubble free-for-all.  Nonetheless, it is the smoking gun in my opinion.

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