Banks, Credit Events, And Sovereign CDS

Tyler Durden's picture

From Peter Tchir of TF Market Advisors

Banks, Credit Events, And Sovereign CDS

As all of Europe is focused on avoiding a “Lehman Moment” and US stocks rally on the hope that some convoluted plan is devised to avoid default and Credit Events at any cost, I still can’t help but think the focus is misplaced and will do more damage than good.

Over the past few months, the CDS of Ireland and Portugal have diverged.  Ireland and Portugal were neck and neck in a race to become the next Greece.  Recently Ireland has improved, and although being only as bad as Italy is a somewhat dubious goal, there has been improvement.  Is there any chance it is because they allowed 3 financial institutions to experience Credit Events?  Allied Irish, Irish Life & Permanent and Bank of Ireland all had Credit Events.  They settled without a problem, as is the norm (in spite of all the talk about CDS and Lehman, the CDS with Lehman as a counterparty settled using the ISDA “replacement” methodology, and all CDS with Lehman as Reference Entity also settled without a hitch).  Is it a co-incidence, that Ireland the sovereign credit, did better once it let these institutions experience a Credit Event?  I don’t think so.  Is Ireland functioning better without this burden taking time and acting like an anchor around its neck?  Yes!

Well, this must be an isolated case, right?  Wrong.  Here is what happened to Iceland.

Iceland as a country was deemed to be in deep trouble by the CDS markets.  After the 3 banks failed it briefly got worse.  Then guess what?  It got better.  Iceland didn’t support the banks, they didn’t give up sovereign funds for that, instead it started the process of rebuilding and is almost back to where it was when the whole crisis started.  Virtually no other country trades tighter than it did in early 2008.

The story in the U.S. is harder to decipher.  One story that can be explained by the data is that the US CDS reacted slightly negatively to the default of Lehman.  The spread increased as the government bailed out AIG (by paying off the banks) and then increased dramatically after it became fully committed to never letting a bank fail.  It is curious that not once since the government caved in to completely support banks at any cost, has the CDS traded as tight as it did in the week AFTER Lehman.  For all the talk about the “Lehman Moment” maybe what we should be trying to avoid is the “Can’t Let a Bank Fail Moment”. 


I am becoming more convinced that the “Lehman Moment” phrase has taken over and there is no rational thought of whether Lehman was merely a catalyst, a catalyst that was inevitable (if it wasn’t Bear, and it wasn’t Lehman, and it wasn’t Fannie, and it wasn’t AIG, it would have been something).  Maybe the moment we should be trying to avoid is the one that allows weak institutions to exist.  The weak institutions do not provide loans because they are too afraid of losses since they mainly survive by the good grace (and money) from governments at central banks.  That is bad enough, but they crowd out new money.  Who is going to go after markets where even a sleepy BAC could briefly wake up and crush you before you ever got started.  I have heard of some interesting companies out there trying to provide loans to those who need them, but they can’t get any traction.  Too Big To Fail aren’t too sleepy to allow potential competitors to grow.

Stocks can rally.  Lehman Moment can be said 500 times today.  Every politician can worry about the impact of triggering CDS.  Every banker can claim the world would end if they are made to pay for their bad decisions.  In the end, Iceland and Ireland both improved only AFTER they let banks fail.  The US, for all the talk about Lehman, is only doing worse than that since it decided banks couldn’t be allowed to fail. 

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gojam's picture

Thanks Peter.

Thought provoking.

SuperRay's picture



(Hey, I know elections are BS anyway, but we need to attack in every way possible)

Copy this URL and send it to everyone you know.  It's a petition.

shaxmatist's picture

You nailed it, Peter.

I believe that letting Lehman fail was the only thing they've done RIGHT.. the rest was fucked up.

Ghordius's picture


Save the banks or the sun will stop rising!
Save the bankers or capitalism will stop to function!

winter is coming's picture

Seems like a never ending rally

gojam's picture

There was this guy in the UK about 20 years ago who believed the world was going to end, he sold his house and all his possessions and he placed all the money on the world ending on a particular date at his local bookmaker who happily took the bet. (this is a true story by the way)

I guess the bookmaker felt he'd never have to pay out whichever way it went.

Interpretation - There is no money to be made betting on an apocalypse.

GeneMarchbanks's picture

'The US, for all the talk about Lehman, is only doing worse than that since it decided banks couldn’t be allowed to fail.'

One problem, there is no US without the banks at least no government. You have banks + government on one side and a sleepwalking population on the other side.

oogs66's picture

i think there would be banks...some would be the same...some would be regionals taking advantage of opportunities and some would be new ones that find opportunities

GeneMarchbanks's picture

You're right. Eventually something would rise from the rubble but first there would be pain. Show me a US citizen ready, not only to go through, but vote for pain. Yeah, good luck, enjoy Romney or that pizza guy.

legal eagle's picture

If you want to clean house of the TBTF, what needs to happen is all "good" people need to stop paying their mortgages.  All "good" people should also stop paying their credit cards.  The banks have robbed homeowners of clear title, they have taken payments under false pretenses (conversion under the law) they have breached their fiduciary duties to borrowers by clouding titles, selling loans and then double dipping by taking payments without the legal authority to do so, by not working with borrowers in good-faith, by not following recordation laws or paying state fees for recordation, and yet, somehow, people still believe that homeowners move from "good" to "bad" the moment they decide they arent playing by the bank's rules anymore.

Protest by strategically defaulting.  It is the only thing that will make a difference.  If 10M people do this, things will change in a big way.


theabyss11's picture

I've been saying this since 07' Its the only way for the people to regain the power.


Dailo's picture


mynhair's picture

(No fill on TZA @ 38, moved bid to 37)

cosmictrainwreck's picture

did you file your App for Primary Dealer status yet?

Mercury's picture

Pretty much Peter.

to parahrase my bad self from earlier this morning - governments are still band-aid-ing this globe-spanning Rube Goldberg contraption designed to prevent risk from ever being accurately priced by market forces.

Let the SHTF already, it's only going to make it worse and it already has.

GeneMarchbanks's picture

'bas delf from earlier this morning:' 

Began the drinking early eh? That green market got ya blue?

slewie the pi-rat's picture

Credit Event Theater

...brought to you by:  20 Mule Team Borax!

bugs_'s picture

waiting for the bank of america moment

gwar5's picture

I thought the Euro would crash, die and go away. Certainly my preference. But now, not so sure and think they'll pull it out of their asses and this is all brinkmanship.


The Fed and China will both eventually backstop the EU in exchange for a higher valued EURO currency that both can export to. This is a three ring currency circus being played out amongst the USD/EURO/YUAN. The Eurozone has fallen but can't print or get up by itself so they lose the currency war and will have to keep the EURO value high in exchange for being bailed out. Once the Euro is done, China will accept this new status quo and unpeg the YUAN. The USD will be free to inflate it's debt away. (Rickards)

Bullish for gold.

falun bong's picture

The problem was that the CDS got a AAA rating. That meant banks could post them in the repo market as collateral, which meant that if they failed, the bank owed the counterparty the amount in cash within 24 hours. The Lehman moment came when the CDS all started going off like grenades at the same time. To keep all the world's ATMs from showing all zeroes, the Feds finally were forced to step in. Otherwise the CDS could still be sitting on bank balance sheets as impaired assets, or even better, marked to $1.00. Happy days.

The Fed bought them up and now they sit on the Fed's balance sheet. The Fed has become the world's biggest and most leveraged hedge fund ever. Wheeee!!! It's all fun and games until somebody pokes an eye out.

We can probably avoid the eye-poke moment for a long time. The Europeans are just approaching their turn but some people on this post are just not worried about it. Personally I just can't seem to convince myself that the laws of gravity have been revoked. Wily E. Coyote eventually looks down....smoke puff ensues.

Coxxy's picture

The coupon changed on iceland, is that factored in on pricing from CMADatavision?  Can you quote the price using ISDA for Iceland based on CDS from CMADatavision?

Thanks for the useful article, I just hope that CMA priced the coupon change correctly as the spread dropped because of the 100/300/500 convention and points up etc. 

AldoHux_IV's picture

Very well said, everyone framing the avoidable at all cost as the Lehman moment was entirely incorrect.  The biggest threat to this system is the fact that we are making the same mistakes (now prescribed as solutions) and will not fix the problem. End the madness, end the suffering, and end the institutional regimes that continue to enslave the world to debt.