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Latest DTCC CDS Update (Week Of August 7)
Continued substantial rerisking continued in financial last week, however at a slightly moderated rate. From the $96.2 billion net notional decline in the week ended July 31, the last week saw a $54.4 billion decline. Total net notional change was one tenth that of the previous week at -$14.5 billion, with a marked derisking in consumer services at $25.1 billion. Other notable derisking spaces were Industrials and State Bodies.
Total Gross CDS outstanding was at $26.3 trillion, a decline of $300 billion from the prior week. This consisted of $15.2 trillion in
single names, $7.8 trillion in indices and $3.3 trillion in tranches,
all of which were about 85% held by dealers. The index gross notional decline has persisted for several months now, leading one to wonder when whoever is unwinding their index position will be finally done? Also, just how is this index arb unwind affecting equity and other markets?
Looking at single name action indicates some quite odd: in the face of the major rerisking in most financials (Morgan Stanley, DB, JPM, Ambac, Merrill, all made up the top 20 reriskers), Goldman was prominently in the derisking category in the 6th top position with over $120 million in net notional increase, yet oddly with $1.5 billion in gross open interest decline. Imperial Chemical was acting quite oddly with $200 million in net derisking on almost $9 billion of gross: a very dramatic delta. Curiously, the USA, whose spread has recently collapse to plain stupid levels, rounded off the list of top 20 net deriskers. Other prominent deriskers ahead of this week's odd stock action, were CIT and AIG, it seems the funds that had purchased the stock decided to hedge by aggressively loading up in CDS.
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http://macroman.blogspot.com/2009/08/poll.html
TD, i don't know about you, but i REALLY think this has gone to far. All this trolling and posting links to blogs with no substance/self-advertising. It kills the discussion AND suffocates the comments worth reading.
I'm not the anon above, but it's clear to me you squawk against anons posting whenever you see an opportunity to do so. I'm sure Tyler can make up his own mind about how he runs his site without you yanking his chain all the time.
Chill out.
Cheeky has a point, though. If the person isn't offering an explanation to a link (whether it be on or off topic), then the post is nothing more than spam. For a reference, look at old open forums on the net. They are almost unreadable because of the automated spammers posting nothing more than links.
And cheeky, you have been taking a lot of heat lately. I just want to say that I enjoy the color that you add to the otherwise dry topic of finance.
Is derisking bearish sentiment on the price of issued debt, or bearish on the expected recovery value in the event of default?
Or have the Fed's misadventures made the market dysfunctional?
Cheeky, a few hours ago you posted a link to an Austin Powers clip on youtube. Bi-polar?
Cheeky, click on "donuts" and if you tell me your favorite, I'll have them ship you a dozen.
http://www.psycho-donuts.com/home/
the last one in the third row ... ship me a dozen of those ...
I would agree with anon above.
Cheeky Bastard posts more than TD and I find CBs posts are mostly cries for attention. Maybe Cheeky Bastard can start his own blog? At least that way he can have full control over the trolls lol
The high yield/treasury spread broke to a new high last week but has since retreated but not yet broken below its previous high,ie JNK/TLT. Maybe we're losing our appetite for risk - again.
The high yield/treasury spread broke to a new high last week but has since retreated but not yet broken below its previous high,ie JNK/TLT. Maybe we're losing our appetite for risk - again.
You have to watch this hearing with Tim Geitner on derivatives:
http://www.endfinancialfraud.org/videos/
A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument -- typically a bond or loan -- goes into default (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded.
These derivatives are private agreements and could include any number of variables including a low stock price as a trigger to pay out. Banks that underwrote those derivatives stand to lose million, billions, or trillions if they pay out (AIG) while for years they thought they were just printing money on low probability events they didn't reserve for. These derivatives could take down the entire banking industry (pump or go bankrupt).
For banks that also can influence securities prices by increasing share price by buying up shares (SLP or not), it might be a much cheaper option to buy up security prices than allow the trigger and pay out on the derivative. It is probably the reason the credit rating agencies are not downgrading securities - it would trigger credit default swaps, so whoever is on the other side of the trade is essentially screwed.
It's difficult for rating company's to keep a good rating on junk stocks when they gravitate toward penny stocks, so I am assuming there is an underlining tug of war going on right now on the triggers for these agreements between banks - banks underwriting the derivatives must be winning as the stock price increases & lack of downgrades likely preference the underwriters with connections.
This means there is rampant speculation by banks - the $13B AIG payout is an example as Lloyd stated they had no exposure to AIG, so the CDS was not some type of risk management hedge - just a ridiculous casino bet. Obviously this creates a huge moral hazard as GS would then have a $13B incentive and conspire to bring down AIG. This is probably happening with many other companies/securities.
Even Warren Buffet is getting into the game and making crazy bets on how high the stock market will be a few years down the road, after first describing these as weapons of mass destruction. He's lost hundreds of millions marking to market his CDS on bonds. The problem is these giants are making huge bets and then trying to rig the game and influence the market to pay off on their derivative bets.
I would investigate these derivatives, their triggers, and motivation/actions by banks to make their own derivatives pay off - it might highlight the real perpetrators of major market improprieties. Many of the negative ETFs have large bank swap counter-parties, so they would benefit if they don't pay off. These companies could just buy up REIT stocks to avoid a payout on the swaps.
hey Apocalypse
just wanted to add something about good-ol Warren Buffet
after preaching for years about the toxicity of CDS and how they are " instruments of financial destruction " he lost about 4 billion issuing those. I mean its one thing to be wrong, and its a whole another thing to mislead your investors and talk about CDS in that manner in the same time when your own company is loosing hundreds of millions per day.
And furthermore, as the Reuters article stated, he benefited in the end by investing a large sum of money into Wells Fargo, GS and GE, and at the same time preaching how he is against government bailout of those institutions. I used to admire the man, but now we all see hes not different in any kind from those WS leeches. Now thats what i call a hedge my friend.
We may need to rethink his cheery view on the economy, he is compromised Cheeky.
"Berkshire shareholders including Mohnish Pabrai, head of Pabrai Investment Funds, have said investors are concerned about losses on the company's $37 billion bet on world equity values more than a decade from now. Buffett sold contracts to undisclosed counterparties for $4.85 billion protecting the buyers against declines in four stock indexes including the S&P 500.
Under the agreements, Berkshire will pay as much as $37 billion if, on specific dates beginning in 2019, the indexes are below the point where they were when he made the agreements. By Sept. 30, Berkshire had written down the contracts by $6.73 billion as the S&P declined for a fourth straight quarter."
So when he was paraded on CNBC and the other shows, he's talking his book - if he has to pay this out in cash in 2019 he could be bankrupt along with his shareholders. He must be betting on hyper-inflation, and it could be a good bet long term but it is still just speculation and we could suffer the fate of Japan (2 decades of staflation - I know you know). He has to mark the losses to market for some time as we enter the depression - then unwind the write-downs later if we enter hyper-inflation - if the 4 exchanges match Japan, the shareholders are out $37B. Buying shares or bonds however are not time dependent.
These bets need to be regulated on an exchange and should be for purposes of risk management hedging only (insurance product with appropriate reserves) - who knows how skimpy the "agreements" were for the AIG payouts to Goldman Sachs. I get the feeling this is two billionaires on a golf course saying, I'll bet you...well you are not going to backstop your casino bets with my tax dollars.
then he, sure as hell, wants to see inflation and more inflation; it would put him ( well not him, he will be dead by then ) right in C11 if we have Japan-style decade or two ....
Is derisking bearish sentiment on the price of issued debt, or bearish on the expected recovery value in the event of default?
Or have the Fed's misadventures made the market dysfunctional?
Yes, I'm stupid but could someone please explain:
-- does re-risking mean reducing notional CDS contracts?; and
-- does de-risking mean increasing notional CDS contracts?
or vice-versa?
Rerisking means unwinding CDS contracts, in these tables net notional, not gross. This is "Bullish". Derisking is accumulation of CDS contracts. Bearish... I just don't know the information content of the sentiment.
That's about all I know. I'm very curious about CDS spread correlations across asset classes.
The high yield/treasury spread broke to a new high last week but has since retreated but not yet broken below its previous
I'm a cds trader, and we never talk about rerisking/derisking. So even I don't know what they are!
most of the decline in outstanding notional comes from tri-party netting of swaps via trioptima, novation to CCH etc.