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Why Blaming CDS For The Sovereign Risk Flare Is Idiotic, And Why Gold Is Now A Global Fiat-Currency Alternative
The ever so handsome Tim Backshall of Credit Derivatives Research explains to all rabid anti-CDSites why CDS is the last thing one has to worry about in the spreading sovereign crisis, and why looking at 10% budget deficits (just like Lehman's $50 billion underwater balance sheet was responsible for the firm's bankruptcy, instead of unfounded speculation that naked shorting was the cause) may be the actual reason why half of Europe will soon have to be bailed out. CDS are merely instruments to express a view. And if Joe Cassano found a job somewhere where he is the party responsible for selling tens of billions in gross sovereign notional, then so be it. That said, bailing out the seller of Greek, or any other nation's, protection will hopefully not become an issue all too soon. Alas, the rumor that this seller may be Goldman Sachs (that BS about Greek banks selling Greek CDS causes 5 minute bouts of hypoxia-inducing guffawing in every CDS trader in the business) may mean that one year from now, when AIG is long forgotten (and defunct), we will be discussing why the Fed bailed out Goldman's Greek exposure at 100 cents on the dollar. Lastly, another point by Backshall - don't sell your gold. Should a full blown fiat contagion take hold, the dollar may go higher, but gold, which can not be printed in the mad dash to prop up the Titanic in its final minutes, will surely not go lower.
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(that BS about Greek banks selling Greek CDS causes 5 minute bouts of hypoxia-inducing guffawing in every CDS trader in the business)
Insurance. It's to the joker what oxygen debt is to a thrashing crocodile.
Things are certainly getting interesting, that's for sure.
It never ceases to amaze me how many mindless idiots are willing to allow complete strangers (presumably CNBC producers) to stick an arm (way past the elbow) up their annal canal and move their mouth, all the while whispering little sweet nothings in their ear, just for the privilege of appearing on the USA's version of Pravda.
It must be love.
"Elbow deep inside the borderline. Show me that you love me and that we belong together..."
"The ever so handsome Tim Backshall..."
I hope Marla wrote this piece under her pseudonyms's nom de plume.
Never trust a man in a pink tie unless he's Marc Faber.
Please forgive my stereotyping but he looks like a refuge from "Goodfellas" or "Casino".
http://en.wikipedia.org/wiki/Goodfellas
http://www.youtube.com/watch?v=o_ff46b58Hk
http://en.wikipedia.org/wiki/Casino_(film)
http://www.youtube.com/watch?v=t09aGcMjnWM
Stay out of Tyler's closet! Lol
I get smaller country CDS, but what I dont get is buying US (or other major country CDS which are probably highly correlated to a US default).
My real question is if you are truly right on the US then how are you going to get paid? Don't people think that if there is a US default (or near default) that the US govt will decree that all US CDS are illegal or unenforceable? If there is a US default, what currency are you going to settle in (worthless dollars)? IF the US defaults, how do think your counterparties are going to look like from a credit perspective (having gorged on treasuries, GSE debt, ....)? I could go on...
Maybe I'm just not getting it, but if I am then buying a major country CDS is at its core just another way to short the bonds (I am aware that the correlation betw Sov CDS and the equivalent Gov debt is not 1).
Am I missing something?
Holders of US CDS do not expect to get paid IMHO.
They buy it because it enhances the value of something else they own or wish to sell. Perhaps it enables them to take on more leverage due to ratings arbitrage.
I guess.
In my previous job (as a creator of some of the more esoteric structured finance products), we used to arb the crap out of the agencies (and, frankly, the internal risks systems so that we could book all of the "P&L" for a long term deal for a particular year). So I can see them being that dumb. But what is they are "hedging" as the agencies (and others) essentially assign 0 credit risk to highly rated sovereigns?
Still not getting it, other than as trading vehicle...
Bingo. And the fact that it enhances value seems full of holes to me. There is a point at which insurance does not work and risk is unavoidable.
Securitizing investment banks bought CDS from AIG and others to enhance the value of the tranches that they sold off. Obviosly the CDS enhanced the value of those tranches by more than it cost or they wouldn't have bought it. It seems likely to me that something similar is going on here with US CDS. I don't claim to understand exactly what, this is just my surmise.
Does anyone think that monolines like ABK and MBI, or mortgage insurers like MTG, PMI and RDN have sufficient reserves to honor credit insurance contracts written? And why are they permitted to write new business?
The answer to me is that they are worth more alive than dead, presumably because their insurance enhances the value of securities held by the GSEs and banks.
So someone is supporting these stocks because if they BK they will damage balance sheets in an unacceptable way.
So credit insurance is no longer intended to buy protection but instead is to support phony accounting and buy time for a little more looting.
Welcome to our Brave New World!
Yeah I get that trade.
We used to do a trade where we bought/structured an asset and had it double wrapped (ie, monoline and CDS or another wrap on the first monoline). Our risk guys would then let us book the spread between the asset return and the cost of the wraps + funding cost as P&L in the year we put the trade on. Needless to say we "looted" away when would could find the right asset.
Still don't get the concept of getting a guarantee on the sovereign. Are people trying to book profits on GSE debt this year by getting CDS on the Government so that they can claim to their risk guys (and eventually the agencies) that the spread is money good?
I'm now out of that game, but it seems a bit far fetched that any one would go for that trade as the correlations between sovereign default and counterparty risk are so high and obvious. But then again who knows....
you nailed it
LMAO. CDS's on sovereigns, what are they going to pay off in?? Unless they are written in ounces of PM they are a sick joke and will be useless for the puchasors.
Disagree with Backshall's comment that the US will not default. The US must default. Only question is how and when. Debt collapse or hyper inflation. When would appear to be soon as the domino's keep falling. Iceland, Dubai, Greece, Ireland, Portugal, ......fill in the blanks......USA.
CDS. Sovereign risk. Counterparty risk is everywhere. Deflation and/or hyperinflation?
I'll take the gold, thank you.
Whew that was close. I almost unloaded my gold for 5000 boxes of Gentle Ben bathroom tissue.
i hear that if you sell gold for dollars Bernanke will personally give you a free reach-around. It is all part of the Fed's new 'stimulus' [of your] package.
Sign me up for the PajamaGram kit.
was that email from ratigan@ge.com?
Debasement of all currencies (including the dollar) is ongoing right now but no one sees it.
Here the proof:
Many are comparing the current move to the one observed in 2008 which is completely wrong...why?
Take the Dollar Index from July the 11th 2008 to September 9 2008 and you can see that it went up by 11.5%
I have done a basket of precious metals (Gold, Silver, Platinum and Palladium) and made a simple Index (you can do that with Gold only if you prefer but taking the four is better) and over the same time period you can see that it has lost 20%.
Today: Dollar Index up 8.2% from lows and basket of precious metals down 9.7%.
You see that the downside leverage has been lost and it shows that once the weak hands and margin calls are done, the upside move could be simply gigantic!!!
This is the reality as it is and we are very close to a major inflection point as Dollar Index rarely goes up by more than 12% in one shot
Live from Berkely, CA with Big Ben in the background! Much debt is indexed to inflation so no, they can't just print their way out of default!
Sorry T Comex Gold is printed daily by the JPM commodity derivatives desk, re-hypoticated and repo-ed many times over, bullion not so much....
Wonder if Backshall is long Gold?
hehe
So hard to tell.
Meanwhile, GG said this a short time ago, as Gold now hovers around 1050.
by Gordon_Gekko
on Fri, 12/11/2009 - 15:04
#160484
Gold might take a peek (or perhaps do an intraday spike) below the 50 dma, but won't go lower than $1080. Unless you are able to predict the future, I would suggest start buying somewhere around the 50 DMA/$1100 area. Below $1100, buy at will. Those who don't own any Gold, I would suggest them to buy it right the fuck now. Those waiting for $1000 Gold (or even $1050) will be waiting FOREVER.
Thanks for the advice Gordo.
Don't quit waiting tables, dude.
Faber expected a low around $1050. We'll see. It does appear a bargain.
Should a full blown fiat contagion take hold, the dollar may go higher, but gold, which can not be printed in the mad dash to prop up the Titanic in its final minutes, will surely not go lower.
Amen
that Titanic reference at the end does remind me of this: http://www.nytimes.com/2008/04/15/science/15titanic.html
regarding the possibility that it was the rivets that were the problem - in that they knowingly used a lower quality one to save money that was not up to the job.
There was I thinking it was the iceberg that sunk it , how could I have been so wrong.
Time for a vacation: http://tinyurl.com/yg7ofvb
Chart here of correlations of gold, CDS's & CPI on a daily basis up to 12/14/09.
http://tinyurl.com/ylbd82h
S&P posits something else is driving the gold price besides sovereign risk & inflation. Perhaps it is simple fear.
If Goldman is bailed out on Greece, Bernanke & Geithner will be from Marie Antoinette's cake knife.
Precious metal markets (specifically gold) are one con game.
Yesterday, gold was down ~$48 (~4.3%) and gold mining stocks (ABX, GG, GDX) were down ~5.5%.
Today, gold was up $1.80 (+0.17%) an gold mining stocks were up ~6%. Note, in a morning, gold was down ~$10 but gold mining stocks were always in a very positive territory.
Finally, now gold mining stocks are trading at levels when gold itself was ~$800.