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Substantial, Over Half A Trillion Net, CDS Derisking Since March Lows
Analyzing CDS open interest data since the March 6 lows demonstrates a troubling trend: there has been over half a trillion in net derisking across various industries, with financials leading the pack with over $130 billion. The global tightening in the CDS universes across all sectors is one direct consequence of this substantial shift to derisking.
However the question emerges: while every buyer is matched with a seller, who is the net seller of all of this protection. After all, this is exactly what brought AIG down - being the end chain seller of gobs of protection in various CDOs. Now that the derisking has moved to the single name inventory, one wonders if the seller is one concentrated entity which has taken on over half a trillion in net exposure. Hopefully the next market crash will not disclose (however we strongly think it will) who is next in running for AIG 2.0
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This aggression will not stand, man.
I'm not sure if you have heard this track...its right up your alley:
http://www.youtube.com/watch?v=2ogFVB8JAbU
But on the topic at hand...Goldman has what AIG never did, the ability to gun the markets higher at will with oodles of Fedmarks. Ugh
Big trouble, soon come.
I bet it is one of the too-big-to-fail banks. It is a no-brainer for them now that Fed has their back. It is of course unethical, so it can't be Goldman.
So, Sovereign derisking has been dramatic BUT spreads are at their tights. Who is sucking up all that risk? Some major European Regulatory Capital Arb risk provider? run roh!
Largest net deriskers in Single-name land since March Lows - Italy, Austria, WFC, BAC, Portugal, France, Belgium, Swiss RE, JPM, Greece, and Germany...
Don't be an alarmist.
You know what else is zero-sum? Options. People are net sellers and net buyers of volatility there as well.
What do you do as a net seller or CDS exposure? You hedge so as to cap your losses somewhere (maybe with an index, maybe with a similar issue, etc) and limit the risk you hold and it goes down the line until someone holds unhedged exposure, the idea being that by the time you get there the probability of the event or the potential liability is sufficiently small that the issuer can stomach it.
See also: Teenie buyers and teenie sellers ( http://books.google.com/books?id=B9tsWYLFnSEC&lpg=PT110&ots=DHAZnkb52o&d... )
Also, you see that sov exposure? Well, that's a risk because I bet a bunch of smarty pants are thinking there wont be sov defaults because the gov will instead just print money to meet payments, which doesnt always happen.
But really, think of this trade: use CDS to create synthetic positions and short Brazil and long Petrobras or short Mexico and long Pemex or short Russia and long Gazprom. This is some really, really, really 101-level shit people.....
I know nothing of CDS trading, but isn't this a good time to buy risk? Any shake-up down the road, by any sovereign, will blow spreads up, and voila, money in the bank. Correct me if i'm wrong, but this doesn't seem to be too bad a wager, unless it's too early.
I like to buy these kinds of risks as hedges. If shit goes south, then owning these bets provides you with liquidity at a time when opportunities are ripe, if everything goes handy-dandy then big whoop, you lost your insurance premium.
It's what happens when economic activity is declining.
Exactly. Starving people have weak appetites.
Surely someone wants to stop AIG 2.0? Surely, it must be fairly well known within certain circles who's carrying the can on all this CDS? Does the Govt actually want to have a second CDS bail-out? It would seem so, yet nobody is prepared to blow the whistle on who's behind it? Amazing!