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Reading Between The Lines Of David Einhorn's Attack On CDS

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Sat, 11/07/2009 - 15:14 | 123515 Anonymous
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umm. we were giving 500000 mortgages to people with no jobs and at that time there was no backstop from the government.

Sat, 11/07/2009 - 18:33 | 123602 anynonmous
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edit (redundant)

Warren (all in bet on America) Buffet sees CDS profit of $1.44 billion in the third quarter


Sun, 11/08/2009 - 11:29 | 123867 Jim B
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Quote from NY Times article "Mr. Buffett was just as scathing on the subject of derivatives, which he had likened to weapons of mass destruction long before they started eviscerating the balance sheets of banks around the world."

Did I miss something, or WB doing the do as I say......

Sat, 11/07/2009 - 15:26 | 123524 Anonymous
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Absolutely brilliant analysis.

Sat, 11/07/2009 - 16:13 | 123556 DiverCity
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Second that!

Sat, 11/07/2009 - 17:58 | 123608 Careless Whisper
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$500 Ta Ta Trillion in CDS and they net out to a $2 Trillion exposure? Yeah right.

Apparently Einhorn struck a nerve.

The spreads on the CDS are too lucrative for the Squid to give up.

"Banks" which are hedge funds in practice, shouldn't be trading CDS with taxpayer backed funds.


Sun, 11/08/2009 - 11:24 | 123865 Jim B
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"Banks" which are hedge funds in practice, shouldn't be trading CDS with taxpayer backed funds.


Sat, 11/07/2009 - 15:28 | 123527 Unscarred
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Great article.  I like your perspective, TD.  One question: what would the the most likely scenario (and subsequent probability- guess that doesn't matter any more, though) that we see a significant interest rate swap disruption on par with the credit pinch in late September '08?

Sat, 11/07/2009 - 15:30 | 123531 Anonymous
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Is it any coincidence Einhorn is long an excessive amount of gold?

Sat, 11/07/2009 - 16:38 | 123569 Missing_Link
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So are a lot of smart people.  Like John Paulson.

Sat, 11/07/2009 - 17:31 | 123593 deadhead
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anybody know if JP bailed out on the bac or rf positions?  thanks in advance

Sun, 11/08/2009 - 10:46 | 123848 chumbawamba
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And like Chumbawamba.

And I happen to be Chumbawamba.

Thu, 11/12/2009 - 01:33 | 128067 Missing_Link
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Grow the fuck up.

Sat, 11/07/2009 - 15:46 | 123543 Anonymous
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Listen to this guy...make a good point on china/gold...and it removes the intervention component from West.

Pierre Lassonde is one of the living legends of the mining and resource world with over 35 years of experience. He was able to build up and successfully merge Franco Nevada into Newmont Mining in what was In this interview Pierre discusses the gold bull market, the Indian Central Bank purchase of gold, competitive currency devaluations, the Dow/Gold Ratio, the undervaluation of mining shares, junior mining shares, the oil market, future consolidation in the mining sector and more.


Sat, 11/07/2009 - 19:50 | 123649 Spitzer
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I am doing what ever Pierre Lassonde is doing.I trust his 35 years of  experinence. His royalty company has no debt and a current and quick ratio of 26.

Sat, 11/07/2009 - 15:50 | 123544 Anonymous
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Great insight. The fact that we have seen almost incessant derisking in DTCC data since the March lows and yet spreads have compressed says something perhaps about the largest CDS market makers willingness to soak up risk with little thought to downside (apparently). The fact that GS and others can write protection knowing that if all ends badly, the government is there leaves many CDS traders 'nervous' to enter anything but arb or RV trades...

Sat, 11/07/2009 - 16:09 | 123553 sgt_doom
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Frigging brilliant, TD, absolutely frigging brilliant!!

You had me going for awhile there; I was beginning to believe in Santa Claus, his Elves, Tinkerbell AND Godzilla.

But the culmination of your brilliant blog/article/exposition brought forth a "Holy Mother of Godzilla!!

So, fundamentally, credit derivatives are, or have been and can be, modelled as a financial virus and controlled by specific parties.

Which more than a few now believe to be the thinking behind their original design.

Interesting....very interesting.....

(Although full credit should go to economist Paul Craig Roberts - not Einhorn - who brought up these very points quite some time ago.)

Although I did happen to see a recent article where Terri Duhon (creater or the BISTRO when at JPMorgan) did still believe CDSes were neat!

Sat, 11/07/2009 - 16:13 | 123555 pinkboxtrader
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bit of an (un)intentional derail here but does anyone have any compelling readings as to why derivatives are a good thing? (theoretical basis) what do they facilitate that isn't otherwise possible? ie. why is the answer not simply reducing risk asset exposure instead of entering a 'hedge' contract? reducing exposure is a 100% perfect hedge and reduces systematic transaction costs. what am i missing here?

i used to think financial engineering was for the sake of real businesses to offload risks unrelated to their core competencies, but with the 'buy stocks as USD weakens because of repatriation of foreign sales' theme i see that currency hedging by legitimate business isn't nearly as comprehensive as i once thought. (why purchase the insurance when you can speculate on a downtrending USD as an exporter of tractors!?!)

Sat, 11/07/2009 - 16:23 | 123561 Pizza Delivery Man
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"reducing exposure is a 100% perfect hedge and reduces systematic transaction costs"

Why buy insurance on your car when you can just get a cheaper car?


Sun, 11/08/2009 - 11:28 | 123866 Anonymous
Anonymous's picture

Why indeed! If you can afford to replace the hardware, then as long as you have too few "available " assets you can leave the liability costs to be socialized. It's the new norm!

Sat, 11/07/2009 - 17:07 | 123580 Anonymous
Anonymous's picture

How does, say, anairline reduce its exposure? It needs x thousand gallons of jet fuel. Enter a long-term contract and you risk falling prices, so you want to hedge. Buy on the spot market and you risk rising prices, so you want to hedge. The analysis is the same for most parties that enter into derivatives. Not all, but most.

Sun, 11/08/2009 - 14:43 | 123978 sgt_doom
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"..does anyone have any compelling readings as to why derivatives are a good thing.."

Anything published by JPMorgan Chase, Goldman Sachs, Morgan Stanley and the Fed will make that "compelling" argument.

And truly, what they facilitate are debt-financed billionaires, and that cannot be repeated enough times --- especially as we know what happens to their debt!

Sat, 11/07/2009 - 17:18 | 123586 lizzy36
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That was a very illuminating Tyler.  Thanks. 

Question:did you ever discover who has taken AIG's place on the street @ the chief seller of CDS?

Sat, 11/07/2009 - 17:35 | 123597 Printfaster
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My money is on the Fed and its agents.

No other way to explain the yield curve versus the implied risk.   The US Treasury cannot pay its bills.  Why on earth can they get the ridiculous yields that they do?  Someone is pressing on the levers, and no bank other than the Fed could be holding those levers.  Unfortunately, the CDSs have no CUSIP numbers.

Rather like the Wizard of Oz behind the curtain.


Sun, 11/08/2009 - 14:46 | 123981 sgt_doom
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Agreed, Herr Printfaster, with JPMorgan Chase, Goldman Sachs, Morgan Stanley trailing behind, and Deutsche Bank and Credit Suisse bringing up the rear.....

Sat, 11/07/2009 - 17:27 | 123591 unemployed
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 Totally agree with your comment TD,  "why is nobody more concerned about the $1.2 quadrillion in interest rate exchange traded and OTC swaps currently in circulation"    There should be some case studies published about what the market manipulators have done with all the different swaps.  Just as the naked short,  buy puts and bonds and CDS on the bear target is a well known strategy,  there must be similar ones in the interest rate and FORex worlds.

 Wished you had a few more words for the opaqueness and complexity of the swaps.  Evidently there are lot of seller and buyers who did not hire that "first year analyst"  and or also missed some of the salient valuing features and possible valuation changing events.

 Before the end of the day,  mortgage securitization valuations were all flawed.  So I disagree with your thinking that CDS valuations are accurate despite the effect of the daily collateral postings.

Sat, 11/07/2009 - 17:56 | 123610 bruiserND
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 One of the most scholarly & important macro economic / finance articles of our lifetime.



FALL OF THE REPUBLIC, parts 1 & 2.

  To view online:  http://www.youtube.com/watch?v=VebOTc-7shU  
Sat, 11/07/2009 - 20:05 | 123654 Spitzer
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hahaha fuck that video, its a joke. So nothing is ever going to go wrong with the plans of these so called globalists ?

Sat, 11/07/2009 - 21:11 | 123673 bruiserND
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Ashley Dupre thinks youre  stupid because you left a paper trail.

She also said your pecker is little & limp .

Nothing has gone wrong with their cram down plans for a decade so why should they go bad now?

Near a million have watched the 2 hour video.



Sun, 11/08/2009 - 05:43 | 123786 Apocalypse Now
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Hahaha - Nice

"We are grateful to the Washington Post, The New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years. It would have been impossible for us to develop our plan for the world if we had been subjected to the lights of publicity during those years. But, the world is now more sophisticated and prepared to march towards a world government. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries." -- David Rockefeller

How would the folks here at ZH like a supranational sovereignty of an intellectual elite and world bankers?  There are times I have wished both the population and selected leaders were smarter, and I can appreciate the allure of eliminating the need for war or WMD by placing agenda compliant leaders throughout the world subserviant through the banking control system (trillions in derivatives & debt), but would his selection of agenda subserviant elite and world bankers make the world a better place?

These people appear to be heirarchical, close minded, dominating, authoritarian, population control genocidal, and controlling - the opposite of a freedom loving people.  They will most assuredly impede our pursuit of life, liberty, and the pursuit of happiness and the bill of rights stands in their way.  They want to rule the world, including you and your body - they can exercise that control through the state (subserviant politicians placed for obedience) or any concentrated power base - all the small and medium sized businesses are inefficient for a heirarchial command and control structure, but the big corporations, GSE's, and governments fit into this structure. 

Check out this short Twilight Zone clip http://www.youtube.com/watch?v=_b9aNclVopk

Sun, 11/08/2009 - 00:15 | 123732 Anonymous
Anonymous's picture

Scholarly? Perhaps for the Primary School crowd. Virtually every comment by every interviewee is "They control everything blah blah blah", and "Their plan is to control everything blah blah blah". Then "back it up" with an out of context comment accompanied with a dramatic background score. Oh, and make sure to show a few smiling faces of the elite so as to make it seem they are laughing at YOU.

This sort of yellow journalism has an audience among those who never stray far from home, and who would be scared and confused if they did. I'd love to see one of those Cabal gatherings with the Rothschilds sitting at the same table as Li Kai Shing and the Mori's and Carlos Salim and the Ambani brothers (on opposite sides, of course) plus Soros and Steve Cohen and the Makhtoum's and al-Thani's and Khalifa's and al-Rajhi's and Putin ....etc. No doubt they're all just the best of buddies.

Very silly.

Sun, 11/08/2009 - 13:02 | 123923 bruiserND
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I refered to Tyler Durdens article as scholarly.

The video addressed "motive & "intent" which no one has investigated, held hearings or been convicted.

 "There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." -Ludwig Von Mises

Sat, 11/07/2009 - 19:05 | 123624 george
george's picture

I have been enlightened time and time again by reading your blog.

Sat, 11/07/2009 - 18:47 | 123629 Fish Gone Bad
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Einhorn is my idol.  Anyone who can beat up a girl, in this case the alpha female of wall street, is A-OK in my book.  </humor>


Sat, 11/07/2009 - 19:20 | 123639 putbuyer
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If you ever needed to justify why ZeroHedge is it! - enough said.

Sat, 11/07/2009 - 20:15 | 123656 buzzsaw99
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Selling insurance against interest rates going higher is not what I'd call risky. I'd be selling it myself if I thought I could get away with it. How much moreso for those in the know who are also too big to fail? No way rates skyrocket, no frikken way. It is a bet on fedres and fedgub manipulation.

Sat, 11/07/2009 - 20:57 | 123672 Ned Zeppelin
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Kudos, TD - this should be published elsewhere, to a broader audience. Fascinating dissection of an opaque subject.  Merits several readings.

Sat, 11/07/2009 - 22:26 | 123694 Anonymous
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Honestly, I get real tired of the deitization of CDSs, sorry TD. The flat facts are that they are basically OK, they serve their purpose, but like Sgt Doom (123553)alludes, they aren't benign. Indeed, as Lizzy36 asked (123586), "who's the new AIG?

The issue is purely one of no price discovery -its all off exchange transactions. Yeah, yeah, yeah, its between two consenting , fully informed and sophisticated parties.

Its funny the change in behavior that occurs when you suggest CDS get traded on an exchange. Apart from the difficulty and capital risk an exchange would have, the bright sunlight of open visibility seems to bring on a Draculean response, or at least on that implies the suggestor is somehow not adult or smart enough to handle the trade.

Did I mention no requirement for reserves against what is an insurance contract? Once again, the behavoir changes. Do the sidestep, baby

Agreed that Einhorn may be talking his book, but that's about all. Put some sunlight on price discovery, and reserve for potential losses, and CDS are on its way to legitimacy. Absent that, its the underlying cause of the next collapse, just like the last

DH- yeah, exactly: who's on the other side of RF? or WFC...and by what multiple...

Sat, 11/07/2009 - 22:34 | 123700 Anonymous
Anonymous's picture

david einhorn is in on it...he is one of the bad guys.


Sun, 11/08/2009 - 00:08 | 123730 tom a taxpayer
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Brilliant, eye-opening analysis, TD! 

That Liquidity Pyramid looks like a Titanic-financial-system-busting iceberg.

Sun, 11/08/2009 - 00:24 | 123734 laughing_swordfish
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I have printed out both your piece and Einhorn's piece as a fairly complete and BALANCED exposition of both sides of the CDS controversy, and am circulating both to my wardroom for further discussion.

Everybody had best study, as there will be a "pop quiz" Monday.

I don't have a problem with CDS's in particular or derivatives in general, but I am concerned that there are "no rules" governing this huge percentage of total liquidity and that if and when such rules and regulations are written that they will be strictly for the benefit of the TBTF players - and certain cephalopodic marine predators.


KptLt. laughing swordfish

9er Unterseeboote Flotille

Sun, 11/08/2009 - 14:39 | 123973 sgt_doom
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"I don't have a problem with CDS's in particular or derivatives in general,.."

I suspect that is due to a lack of understanding (no criticism implied here, it has taken me some years to fully comprehend the credit derivatives market, the credit default swaps subcategory, and the history of securitized instruments and its previous appearance leading up to the Great Depression - the first one in the '30s, that is).

Credit derivatives in general (and there are now over 3,000 categories and growing) and credit default swaps in particular, work as a reverse insurance pool.  Instead of thousands of of people funding one pool, from which the injured party will receive a proper payout, the credit default swap is generally structured the opposite:  one individual or corporate entity purchases thousands of credit default swaps against one borrower (an unlimited number of CDSes can be purchased against one entity, you realize?), and then the purchaser burns down their house, so to speak, thus receiving payouts on thousands of policies, all unknown to the original borrower --- thus providing for the perfect insurance swindle!

Instead of the oft-repeated "transferring risk" or "removing risk" what in reality occurs is the compounding of risk to infinity.

This entire scheme is designed to allow for ultraleveraging, with the principal result - by design - of debt-financed multi-millionaires and billionaires.

Sun, 11/08/2009 - 15:55 | 124010 Anonymous
Anonymous's picture

Great analogy! This comment alone would scare the crap out of any reasonable person. But of course, those reasonable people are not the billionaires, who -- of course -- control the media.

Sun, 11/08/2009 - 05:54 | 123792 Anonymous
Anonymous's picture

Thank you for this article.


Sun, 11/08/2009 - 06:32 | 123795 Anonymous
Anonymous's picture

"At that point, watch for $1.2 quadrillion in interest rate bets to politely (or not) line up in front of the single file exit door of the burning theater. This begs the question: who has "sold" this incomprehensible amount of IR protection, and has bet the ranch, city, country, and basically all of capitalism, that a black swan in the IR arena will never happen?"

Hmmm...who believes in "unconventional" monetary policy solutions? Who keeps trying to tell Congress that the world as we know it would come to an end if his organisation was audited?

Sun, 11/08/2009 - 07:53 | 123801 Stevm30
Stevm30's picture

not even printing another $23 trillion in actual dollars (printing, not mere guarantees) won't save the financial system.

don't you mean "will save"?


Also - what does the "fresh start" look like?

Sun, 11/08/2009 - 10:00 | 123831 Anonymous
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Retail can trade cds at this website:


Sun, 11/08/2009 - 10:42 | 123844 chumbawamba
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Wow.  After reading this I've come to realize that the finance industry is a waste of humanity.  We should close down Wall Street entirely and put all those good people to work in the fields to provide some actual value to humanity growing food.

I am Chumbawamba.

Sun, 11/08/2009 - 11:20 | 123863 Anonymous
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Go home, you pathetic daytrader, go home

Oh wait, give you're a DAYTRADER you're probably already AT HOME....sponging off other hard working americans.

Do NOT follow this link or you will be banned from the site!