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The CDS Market And Anti-Trust Considerations

Tyler Durden's picture




 

The CDS index market remains one of the most liquid sources of hedges and positioning available (despite occasional waxing and waning in volumes) and is often used by us as indications of relative flows and sophisticated investor risk appetite. However, as Kamakura Corporation has so diligently quantified, the broad CDS market (specifically including single-names) remains massively concentrated. This concentration, evidenced by the Honolulu-based credit guru's findings that three institutions: JPMorgan Chase, Bank of America, and Citibank
National Association, have market shares in excess of 19% each
has shown little to no reduction (i.e. the market remains as closed as ever) and they warn that this dramatically increases the probability of collusion and monopoly pricing power. We have long argued that the CDS market is valuable (and outright bans are non-sensical and will end badly) as it offers a more liquid (than bonds) market to express a view or more simply hedge efficiently. However, we do feel strongly that CDS (indices especially) should be exchange traded (more straightforward than ever given standardization, electronic trading increases, and clearing) and perhaps Kamakura's work here will be enough to force regulators and the DoJ to finally turn over the rock (as they did in Libor and Muni markets) and do what should have been done in late 2008 when the banks had little to no chips to bargain with on keeping their high margin CDS trading desks in house (though the exchanges would also obviously have to step up to the plate unlike in 2008).

 

Kamakura Corp. - The Credit Default Swap Market and Anti-Trust Considerations

Donald van Deventer __ 1/19/2012 3:22 AM

This is the seventh in a series of blogs on trading volume and the degree of competitiveness in the credit derivatives market. In this post, we use credit derivatives data from the Office of the Comptroller of the Currency from June 30, 1998 to September 30, 2011 to measure the degree of concentration among commercial bank dealers in the credit derivatives market.  We conclude that the credit derivatives market is very highly concentrated, which increases the probability of collusion and monopoly pricing power.

The first six blogs in our series on trading volume in the credit default swap market focused on the share of dealer-dealer trading, trading volume in all 1,090 reference names reported by DTCC, trading volume and its implications among banking companies, and trading volume in sovereign, municipal and sub-sovereign entities:

    van Deventer, Donald R. “Collusion and CDS Dealer Volume,” Kamakura blog, www.kamakuraco.com, January 4, 2012.

    van Deventer, Donald R. “CDS Trading Volume for 1,090 Reference Names,” Kamakura blog, www.kamakuraco.com, January 9, 2012.

    van Deventer, Donald R. “Credit Default Swaps and Deposit Insurance,” Kamakura blog, www.kamakuraco.com, January 10, 2012.

    van Deventer, Donald R. “Municipal Credit Default Swap Trading Volume,” Kamakura blog, www.kamakuraco.com, January 11, 2012.

    van Deventer, Donald R. “Sovereign Credit Default Swap Trading Volume,” Kamakura blog, www.kamakuraco.com, January 12, 2012.

    van Deventer, Donald R. “International Bank Credit Default Swap Trading Volume,” Kamakura blog, www.kamakuraco.com, January 18, 2012.

The data used in the first six blogs in this series is from the Depository Trust & Clearing Corporation, downloaded from www.dtcc.com.  In studying the degree of competitiveness in the credit default swap market, we need the share of each dealer in the market place.  Ideally, we would have this data both for all credit default swap transactions outstanding and for all credit default swaps traded over a specific time interval, such as the most recent week.  This data exists in the DTCC credit default swap warehouse, but it has not been disclosed to the public.

As a result, we are forced to use an alternative source. We use instead the quarterly report from the Office of the Comptroller of the Currency entitled “Quarterly Report on Bank Trading and Derivatives Activities.” Historical copies of these reports are available at this link:

http://www.occ.gov/topics/capital-markets/financial-markets/trading/deri...

Total derivatives outstanding are compiled for all commercial banks in the United States from the Quarterly Report of Condition and Income (“call reports”) filed by each commercial bank in the United States, including U.S. bank subsidiaries of foreign banks. In this blog, we use the notional amount of “credit derivatives (over the counter)” to measure the degree of concentration in the U.S. banking market for credit derivatives.  This measure is an approximation to the full data maintained by DTCC because (a) we are measuring notional principal only for transactions booked in U.S. banking entities, not all entities world-wide, and because (b) we have excluded other types of legal entities dealing in the credit derivatives market like Lehman Brothers and Bear Stearns.  We look forward to repeating this analysis once DTCC makes disclosure that parallels that provided by the OCC.

The OCC Quarterly Report on Bank Trading and Derivatives Activities lists notional principal outstanding both for the top 25 commercial banks in the United States (Table 1) and for the top 25 bank holding companies in the United States (Table 2).  This blog focuses on commercial bank data in Table 1.  A similar analysis can be done using data from Table 2.

Measuring the Degree of Competitiveness in the Credit Derivatives Market

The U.S. Department of Justice website www.justice.gov summarizes the calculation and use of the Herfindahl-Hirschman Index (“HHI”) to measure the concentration in a given market as follows:

Note that a perfectly competitive market place with thousands of competitors with very small market shares would have an HHI index value of 0.  A complete monopoly would have an index value of 100 x 100 =10,000. We now calculate the HHI for the U.S. commercial bank market in credit derivatives.

Herfindahl-Hirschman Index for September 30, 2011

The quarterly OCC report ranks the top 25 commercial banks by derivatives volume. Only 21 commercial banks in the United States had credit derivatives outstanding in the September 30, 2011 listing. They were ranked by notional principal in credit derivatives as follows by dollar amounts in millions:

The total amount of credit derivatives outstanding was $15.659 trillion dollars.  We calculate the market share of the participants in credit derivatives among U.S. banks as follows:

Three institutions, JPMorgan Chase, Bank of America, and Citibank National Association, have market shares in excess of 19% each.  The HHI is the sum of squared market shares (expressed as a percent).  The HHI for September 30, 2011 is 3,014.  This is a very large excess over the 1,800 level at which the Department of Justice considers a market to be concentrated.

Measuring the HHI from 1998 to 2011

We now measure the HHI for each quarter beginning June 30, 1998 until September 30, 2011 to see how the degree of market concentration has varied over time, remembering that we are including only credit derivatives booked at commercial banks.  During this period, the following commercial banks were listed as having credit derivatives outstanding. As is typical of U.S. banking regulatory reports, alternative spellings for the same legal entities were used. This did not affect the calculations that follow, however.

ALLY BANK
BANK OF AMERICA NA
BANK OF AMERICA NT&SA
BANK OF NEW YORK
BANK OF NEW YORK MELLON
BANK OF OKLAHOMA NA
BANK ONE NA
BANK ONE NATIONAL ASSN
BANKBOSTON NA
BANKBOSTON NATIONAL ASSN
BANKERS TRUST CO
BMO HARRIS BANK NA
BOKF NATIONAL ASSN
BRANCH BANKING&TRUST CO
CAPITAL ONE BANK
CAPITAL ONE NATIONAL ASSN
CHASE BANK OF TEXAS NA
CHASE MANHATTAN BANK
CHASE MANHATTAN BANK NA
CHASE MANHATTAN BANK USA NA
CITIBANK N A
CITIBANK NA
CITIBANK NATIONAL ASSN
CITIBANK NEVADA NA
CITIBANK SOUTH DAKOTA
CITIBANK SOUTH DAKOTA N A
CITIBANK SOUTH DAKOTA NA
COMERICA BANK
COUNTRYWIDE BANK NA
DEUTSCHE BANK TR CO AMERICAS
FIA CARD SERVICES NA
FIFTH THIRD BANK
FIRST NB OF CHICAGO
FIRST TENESSEE
FIRST TENESSEE BANK NA
FIRST TENNESSEE BANK NA
FIRST UNION NATIONAL BANK
FLEET NATIONAL BANK
FREMONT INVESTMENT&LOAN
GMAC BANK
GOLDMAN SACHS BANK USA
HARRIS NATIONAL ASSN
HARRIS TRUST&SAVINGS BANK
HSBC BANK USA
HSBC BANK USA NATIONAL ASSN
HUNTINGTON NATIONAL BANK
IRWIN UNION BANK&TRUST CO
JPMORGAN CHASE BANK
JPMORGAN CHASE BANK NA
KEYBANK NA
KEYBANK NATIONAL ASSN
LASALLE BANK MIDWEST NA
LASALLE BANK NA
LASALLE BANK NATIONAL ASSN
LEHMAN BROTHERS COML BK
MELLON BANK NA
MELLON BANK NATIONAL ASSN
MELLONG BANK NATIONAL ASSN
MERRILL LYNCH BANK USA
MORGAN GUARANTY TR CO OF NY
MORGAN STANLEY BANK NA
NATIONAL CITY BANK
NATIONAL CITY BANK OF IN
NATIONSBANK NA
NATIONSBANK NATIONAL ASSN
NORTHERN TRUST CO
PNC BANK NA
PNC BANK NATIONAL ASSN
RBS CITIZENS NATIONAL ASSN
REGIONS BANK
REPUBLIC NB OF NEW YORK
STANDARD FEDERAL BANK NA
STATE STREET BANK & TRUST
STATE STREET BANK & TRUST CO
STATE STREET BANK&TRUST CO
SUNTRUST BANK
SUNTRUST BANK ATLANTA
TD BANK NATIONAL ASSN
TD BANK USA NATIONAL ASSN
U S BANK NATIONAL ASSN
UBS BANK USA
UNION BANK NATIONAL ASSN
UNION BANK OF CALIFORNIA NA
WACHOVIA BANK NA
WACHOVIA BANK NATIONAL ASSN
WELLS FARGO BANK NA
WOODLANDS COMMERCIAL BANK

The value of the HHI from June 30, 1998 to September 30, 2011 is shown in this graph:

Somewhat surprisingly, at a commercial bank level, the HHI index history shows that the index was extremely high in the period from 1998 to 2003, in the early stages of the credit derivatives market.  It is not surprising that a few pioneers dominated the market for credit derivatives at that time, but the peak of the index near 5,000 is an astonishing degree of concentration.  If Lehman Brothers and Bear Stearns had been included in the calculation, obviously the measured HHI would have shown an increase as the number of competitors in the CDS market decreased.  During the last several years, the index has been fairly stable but at a level that still shows a highly concentrated market.

Implications for Regulators and the Department of Justice

The credit derivatives market shows a very high degree of concentration and that high level of concentration has persisted since 1998.  There are only three significant credit derivatives counterparties among U.S. commercial banks as of September 30, 2011.  This raises the possibility of collusion, market manipulation, and monopolistic pricing practices.  Such issues have become important in the Libor market and the market for municipal bonds.  We urge regulators and the Department of Justice to apply maximum scrutiny to the credit derivatives market in the United States, as authorities in the European Union have begun to do.


 

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Sun, 01/22/2012 - 17:20 | 2086992 Money never sleeps
Money never sleeps's picture

Better trade natural gas, man! http://bit.ly/jmgPLz

Sun, 01/22/2012 - 17:51 | 2087034 trav7777
trav7777's picture

I dunno; I can't agree with Tyler that the CDS market is "valuable"...it doesn't appear to add any value to anything.  It's just another bullshit paper market to trade pinhead angels.

Sun, 01/22/2012 - 19:21 | 2087152 ZeroPower
ZeroPower's picture

For the sole fact that shorting bonds is never as evident (or possible) as shorting stock, CDS remain the go to option for a negative bet on a firm's debt. Remove CDS, then go ahead and remove all options on stock, FX, IRS, etc.

Sun, 01/22/2012 - 19:39 | 2087177 trav7777
trav7777's picture

CDSs were used for a lot more than that.  If that's ALL CDSs were, I could see it.

CDSs were used to create synthetic debt instruments and to enable the entire CDO market structure.  They hurt more than they helped.  Fuck shorting a firm's debt; I don't care. It doesn't yield any of us anything in benefits that some big fish can short SHLD or Greece bonds.

We hear all the time how these positions increase "liquidity" and improve market function...show the evidence.  Seems like total bullshit to me at all levels.

Sun, 01/22/2012 - 22:26 | 2087421 ucsbcanuck
ucsbcanuck's picture

CDS was originally meant as a hedge, a form of insurance - even in Greece right now the Greek banks hold a lot of the CDS.

It should be regulated, agreed. But let's not throw out the baby with the bathwater i.e. if you want to bet, fine, but you better be ready to pony up when things go against you...

Sun, 01/22/2012 - 22:42 | 2087459 trav7777
trav7777's picture

this baby is a fucking mutant demon spawn from hell.  Throw it the fuck out now before it kills everybody.

Mon, 01/23/2012 - 00:39 | 2087670 Ghordius
Ghordius's picture

Trav is right, IMO, the "baby" is a mutant spawn from hell that DISTORTS traditional markets. See bonds yields.

CDS will bring down the house or they will be banned, either way we will all see them disappear. TD is wrong, but his love for hedgies makes his otherwise piercing gaze blind.

But hey, nobody is perfect.

Mon, 01/23/2012 - 08:03 | 2088123 ZeroPower
ZeroPower's picture

What about bond yields? Academia shows there is no confirmed link between CDS moving bond yields. Tail wagging the dog has simply never been confirmed in this case.

Sun, 01/22/2012 - 17:20 | 2086994 Boilermaker
Boilermaker's picture

Uhhh...SO?

They aren't going to trigger....ever.

Sun, 01/22/2012 - 17:50 | 2087030 disabledvet
disabledvet's picture

They triggered in 2008...and that cost you and me as taxpayers tens of billions cuz AIG spent 100 million on a guy who had no clue what he was doing. Will the CDS's be triggered upon Greece's total collapse? If you never make a payment on any debt thereafter you could argue "no." but Italy doesn't have that option...and that's what these banks and our Treasury have their eye on when talking "end of the world scenario's" that are far too real and far too apparent.

Sun, 01/22/2012 - 17:52 | 2087035 trav7777
trav7777's picture

CDSs only trigger when the public sector is the counterparty.

We went to the moon without CDSs.  They don't add any value to society.

Sun, 01/22/2012 - 17:58 | 2087044 Boilermaker
Boilermaker's picture

Exactly why it won't ever happen again.

Sun, 01/22/2012 - 17:26 | 2087003 Money never sleeps
Money never sleeps's picture

There is no spoon. It is simply ridiculous how the whole financial industry has become a total scam. 

Sun, 01/22/2012 - 17:28 | 2087008 sitenine
sitenine's picture

A friend put this video together for you ZHers.

Enjoy.

http://www.youtube.com/watch?v=rLLGc2FAgoI&feature=youtu.be

Sun, 01/22/2012 - 19:08 | 2087135 Conrad Murray
Conrad Murray's picture

Poor Jesus. Why does the white man continue to portray you as a white devil? Why do the masses allow this illusion, this perversion of truth, to carry on?

Anyhow, a tit for a tat - https://www.youtube.com/watch?v=kEtBs6j7QgU&t=30s

Sun, 01/22/2012 - 17:36 | 2087014 slewie the pi-rat
slewie the pi-rat's picture

CDS should be exchange traded

but, the Big 3 might not like that as well!

HSBC is 4th and theSquid is 5th  L0L!!!  that's competition isn't it?  <sharkSnark>

concentrated risk in the derivatives market lodged inthe TBTFs, many of whom are insolvent!  rilly?

but with the DOJ's HHI, this is great!

the DOJ!!!  Hahahahahahaha!!!

Sun, 01/22/2012 - 18:03 | 2087050 disabledvet
disabledvet's picture

What did Kenyes say? "If I owe the bank a thousand dollars I'm in trouble but if I owe them millions of dollars they are"? He forgot to add "but if the bank owes the government a trillion dollars then we're all phucked."

Sun, 01/22/2012 - 19:21 | 2087150 slewie the pi-rat
slewie the pi-rat's picture

i gave trav his first greenie on each post!

what about this shit?

we've has some articles on re-hypothecation---using the same security for collateral more than once

and, these swaps are issued in multiples of the underlying, are they not?  you don't need to hold the bond to buy/own the "insurance"

is there a "connection" between the multiple collateralizations and the muliple insurance policy "contracts"? or is this just banksters' golf and tennis?

if you take out insurance on your neighbor's house and it burns down---well, that is why you hafta own the asset to insure it.  try taking out a life insurance policy on one of the preZidential candidates and see what happens

most of us don't know the whole file on this stuff, but we're here thinking about it.  i'm old school in that if you don't like the risk, don't buy the fuking bond! 

too simple?

Sun, 01/22/2012 - 22:18 | 2087427 ucsbcanuck
ucsbcanuck's picture

No you have a point - however, how about the people who are exposed to the company but don't hold the bonds and need some form of insurance. CDS is a proxy for that. It's not that simple.

Really, what we need is some form of regulation and reduction of counterparty risk i.e. you're going to write CDS - better be ready to pony up if things go against you.

Mon, 01/23/2012 - 00:55 | 2087728 slewie the pi-rat
slewie the pi-rat's picture

i don't understand how people can be "exposed to the company" unless they choose to be and if ya don't like the risk, why invest there? 

options are derivatives, too.  and they serve a purpose, too!  but not for 90+% of the players; they are just gambling!  sure, you can be in the "business" of buying and selling risk in the CDS "markets" too,  you will be fading the gamblers or gambling yourself!

have people forgotten that these self-same wunnerful banksters have almost certainly destroyed the global economic system by

  • creating fradulent loans based on fraudulent apps and fraudulent appreaisals
  • creating MBS thru fraudulent loan recording schemes
  • paying their buddy ratings agencies for AAA ratings which they knew were false selling the MBS to their clients as "investment grade"
  • turning around and buying CDS on the shitty tranches they just sold to the suckers
  • awaited the CDS market's 'recognition of their precognition'
  • looting the Treasury to 'save the system'
  • and don't forget saddling the taxpayer with fannie&freddie's IOU service, so nobody will notice the entire fuking zombieFascist criminal enterprize is BK and just extorting money from the people, printing money and adding debt as fast as they can and lining their pockets with the proceeds, until the ponzi collapses
  • huh?

that "counterparty risk & paying up" problemo is why many of them are insolvent zombies in this market today!  they need to be liquidated themselves!  but apparently the synthetics based on the price behavior of these contracts over time is a superior risk assessor to the ratings agencies? (as one advocate heralded)

wowser!  what a valuable market, BiCheZ!

and have we also forgotten that these self-same motherFukers legislatively gutted the laws to prevent them from doing this [which were instituted the last time they blew the world economy to smitherfukereens] and that those laws are still gutted no matter now much you want to believe the 24/7 propaganda?  and why were those now-defunct laws instituted in the first place?  anyone?  yes!  to prevent against systemic risk caused by insane capital leveraging by the various...[wait fot it...]...counterparties who are themselves structurally necessary, systemically! 

this may be some of the reasons why some of us idiot retail types are marginally dubious about this shit

we fuking know that glassSteagall WAS OUR CITIZENS' DEFAULT INSURANCE!!!

Mon, 01/23/2012 - 02:06 | 2087881 Nobody For President
Nobody For President's picture

Plussed on that! You are in fine form tonight Slewie...great ranting summary of our financial clusterfuck circle jerk system presently in place.

Whatcha drinkin'? I want some...

 

nfp

Mon, 01/23/2012 - 02:24 | 2087900 ucsbcanuck
ucsbcanuck's picture

Some people have no choice e.g. pension-holders and suppliers. If a pension fund of a company buys a CDS to insure an amount equivalent to the pension liability and the company goes BK, then the pensioners are somewhat assured of their payout. I say somewhat because it depends on the counterparty LOL!

But yeah you're right - CDS have been abused. They need to be regulated a whole lot better.

Mon, 01/23/2012 - 06:07 | 2088057 slewie the pi-rat
slewie the pi-rat's picture

hey, thxz for the feedback, both you guys

L0L!!! i know! 

step right up and have your pension guananteed by an insolvent or potentially insolvent counterpary!  BAC, CIT, or HSBC~~let's spin the wheel and see just how fuking broke you are gonna beeee!

ok!  you got the pimpco promise and the BAC "countrywide" swap guarantee!   you say you just lost your home to the bank, too!  and the corporation you have served for 11 years is cutting back 10% next month, too? 

well, you just head over toward our incredibly buxom, half-naked, 14 year-old hostess, riiight thru the invisible spinning propeller blade over there...

...that's riiiight...

and for our next guest?  tell us who "spins" next!

Sun, 01/22/2012 - 17:32 | 2087015 Everyman
Everyman's picture

OH hell no, we can't have AT&T and TMobile deal go through, that is monoploy, but when 3 banks have betyter than 90% of the CDS market and the DOJ and Regulators are sitting on their hands?  Don't know who to shoot firts, DOJ assholes and regulator assholes, or the Monopoly of the 3 banks???

And these people in this industry think they are such fucking geniuses!!!! Hell anybody can steal and gain in a loaded game.  Let them then "cover their own bets".  How much you wanna bet that this is leveraged to the hilt as well???  FUCK BOA,CITI, and JP FUCKING MORGAN.  FUCK 'EM ALL AND I HOPE THEY ALL FUCKIN DIE!!!!!!!!!!!!!!!!!!!!!!

Sun, 01/22/2012 - 17:50 | 2087033 Desert Irish
Desert Irish's picture

And these people in this industry think they are such fucking geniuses!!!!

Got to hand it to them, who the hell else could get away with this shit whilst raking in the profits and paying themselves huge bonuses at the same time. They'll continue to get away with it because everyone knows they are TOO BIG TO FAIL, pure fukin genius......

 

Sun, 01/22/2012 - 19:11 | 2087138 Conrad Murray
Conrad Murray's picture

"Don't know who to shoot firts, DOJ assholes and regulator assholes, or the Monopoly of the 3 banks"

Kill them all, let Shaytan sort it out.

Sun, 01/22/2012 - 17:34 | 2087016 Gunga
Gunga's picture

!...There's a time when the operation of the machine becomes so odious—makes you so sick at heart—that you can't take part. You can't even passively take part. And you've got to put your bodies upon the gears and upon the wheels, upon the levers, upon all the apparatus, and you've got to make it stop. And you've got to indicate to the people who run it, to the people who own it, that unless you're free, the machine will be prevented from working at all."

Sun, 01/22/2012 - 17:54 | 2087037 Undecided
Undecided's picture

http://www.theglobeandmail.com/news/world/worldview/assassinate-obama-if... Isreal calls for obama to be assasinated if he does not attack Iran lol

 

Sun, 01/22/2012 - 19:58 | 2087198 Schmuck Raker
Schmuck Raker's picture

Excuse me Undecided. Were you aware that it was an American, in Atlanta, that wrote the original newsletter piece making that suggestion. NOT someone in Israel. And certainly not Israel the state.

Mon, 01/23/2012 - 01:03 | 2087761 Undecided
Undecided's picture

LOL and who do you think sponsors the Zionist Media, anyhow i got nothing against the Jewish People, just Zionism.  U.S.=Zionist lobbied state.

Sun, 01/22/2012 - 17:56 | 2087039 oogs66
oogs66's picture

I'm all for exchange traded CDS! Regulators have failed us miserably since 2007 when bear first got in deep trouble.

Sun, 01/22/2012 - 17:58 | 2087045 zeroGtoilet
zeroGtoilet's picture

I'm probably missing something here, but in the case of a credit event aren't those CDSs going to be paid off from the assets from the depositors FDIC insured accounts at those banks? I'm thinking that the concentration just means they're the only ones willing to make massive gambles with other peoples money.

Sun, 01/22/2012 - 18:07 | 2087055 disabledvet
disabledvet's picture

No worries, mate! We'll just take it out of defense spending! (and Social Security, Medicare, Medicaid....

Sun, 01/22/2012 - 18:22 | 2087077 Lord Welligton
Lord Welligton's picture

paid off from the assets from the depositors FDIC insured accounts at those banks

Did not Bank of America transfer over $50 Trillion gross to its FDIC insured arm?

Sun, 01/22/2012 - 18:31 | 2087091 Dr. Engali
Dr. Engali's picture

I think it was 75 trillion.

Sun, 01/22/2012 - 18:36 | 2087095 Lord Welligton
Lord Welligton's picture

That's ok then.

:)

:)

 

 

Sun, 01/22/2012 - 18:12 | 2087059 jm
jm's picture

I've  said this before, I'll say it again. 

There is a differecne between centrally cleared and exchange traded.  Centrally cleared is great and needed.

Imposing the level of uniformity of CDS necessary to make them exchange traded will turn them into something worthy only of an ETF junkie.  I'm sure many shark salivate at the idea of pushing this idea out to sea, but that doesn't make it a good idea.  If they can draw money into a loser like VXX, then what do think they will do with a CDS ETF?  I'm inclined to think something like "track" CDX by stuffing it with a bunch of 9y10y crap.

CDS exist for a purpose that is not retail.  Lots of different motives that influence trigger covenants.  They need a dealer to execute, which explains in part the concentration, and another part is the lack of risk control short and lack of counterparty exposure knowledge on the long side.

So let the dealer get his due otherwise there is no market.  This market beats rating agencies, and this is a part of its value.

Sun, 01/22/2012 - 19:15 | 2087142 ZeroPower
ZeroPower's picture

Spot on. With no dealers here, there is no market.

Only thing i'd add is how it really gets me that on the slightest hint of volatility MMs will milk the shit out of the b/o on an uber liquid main/sovx/xover. Oh, wanna get hit? Sorry, price just moved 10bp. Obviously never in your favor.

Sun, 01/22/2012 - 21:24 | 2087306 jm
jm's picture

Totally agree about the spread games.

Sun, 01/22/2012 - 20:26 | 2087240 slewie the pi-rat
slewie the pi-rat's picture

a few years ago i was in a poker tournament in nearby city and had made it down to two tables, so i had made the break-even point on the afternoon, but the nicer prizes were the top 3, as usual

this was before the bailouts, before TSHTF.  there was some chatting about the RE and securities markets and a young "kid" in his 20's was on my right, making some very perceptive and "contrarian" comments now and then.  nothing like here, but one of the guys exchanged a coupla mildly barbed comments w/ the kid

he wasn't offended, but he did explain himself:  look!  i trade securites with my dad~~swaps~~insurance bets on what some of this mortgage stuff is worth. we've just made a fortune on the risk markets beginning to realize how bad the mortgage situation really is!  be careful, that's all!

even i'm not fool enough to argue the value of this market to someone who is trading in it.  if you want to swim in their big, ginormous pool, you just go ahead, but:

  1. please do not send the water bill to others any more, and
  2. the last time you swimming-pool types sprung a little "leak", the water supply for the whole town went into the creek!
Sun, 01/22/2012 - 21:31 | 2087316 jm
jm's picture

I agree with this sentiment entirely.  But maybe we should be blaming Greenspan/Bernank/Fed and priviledged powers that be who have been bailing out the bad bets since at least LTCM.  This is what makes the market so huge and prone to radical failure in pricing risk:  there is a put under it. 

Voters should demand that they take away this put.  While I think that Ron Paul is scum like the rest, lhe would at least move in this direction which is worth something.  

Let the strongest/most nimble survive. 

Firewall off the collateral damage to the real economy, so that it doesn't destroy employment and lead to depression.

Start all over on sounder footing.

Mon, 01/23/2012 - 01:05 | 2087758 slewie the pi-rat
slewie the pi-rat's picture

thxz, jm,  but i'm not convinced this is the most appropriate approach, as per my most recent @23:55, above

 

Mon, 01/23/2012 - 06:59 | 2088077 GeneMarchbanks
GeneMarchbanks's picture

'The Capitalists will sell us the rope with which we will hang them.' -Lenin

I love the absolute nonchalance emanating from jm's post. Yeah, he's right lets hold the Fed accountable, certainly it hasn't been tried, right? Yes fuck Ron Paul, he is scum another good point. That is some high moral ground you stand on.

Truth is, you and others of this point of view have a sad case of market myopia and are on the way out. Why? Because you don't give a fuck, that's why. Others are the problem and you're quick to point out the faults of who should have been held accountable but now that they haven't we can just continue with shady practices.

In the end, it matters not. Truth again be told, you're too dumb and fear is what you base your life on so there is no going back. Whether the practice of eating your own stomach makes sense or not is past, keep eating. Soon it won't matter anyway.

Mon, 01/23/2012 - 07:20 | 2088090 Ghordius
Ghordius's picture

jm, those "bad bets" were ILLEGAL and some bright fellows thought we should go back to the roaring twenties - why don't we deregulate insurance when we are at it? I'd love to "expose myself" to the "risk" that some other people's houses don't burn down or something similar.

Mon, 01/23/2012 - 09:43 | 2088296 jm
jm's picture

I love how it is OK at Zero Hedge to impose a straw man regardless of what a post says and then bash away.

Where do I say that illegal activity should be condoned? All I am saying is that the Greenspan/Benrnanke/Fed put is a lareg part of the problem.  If you two weren't so blind by whatever you would agree.

Look. For you and the fractal nitwit above, finance is not immoral.  It is amoral.  The natural process of weeding out sentimentality makes it what it is.  As a result, if the Fed put money on the table, people are going to take it.  This doesn't make it right or moral.  It is just how it is.  To "fix" start by 
keeping cronies and politicians from putting money on the table.  Depending on morality or regulators to guide financial behavior is laughable.

Mon, 01/23/2012 - 11:24 | 2088618 GeneMarchbanks
GeneMarchbanks's picture

'For you and the fractal nitwit above, finance is not immoral.  It is amoral.' 

Read that to yourself again if need be. I really cannot even dignify that with a response, it's as if you threw a bunch of words together pretending it is a sentence(s). But you carry on only go farther into the shitpile that is your thought process:

'The natural process of weeding out sentimentality makes it what it is.  As a result, if the Fed put money on the table, people are going to take it.  This doesn't make it right or moral.'

Either you're completely detached or willfully naive. Greenspan is gone, probably spewing mouthgarbage at Davos, the Fed is alive and stronger than ever with Bernankes words being taken as gospel. That entire argument is valid no doubt but i) has been proven futile so far and ii) only detracts from the CDS debate.

Buddhist symbolism and intellectual bullshit only adds to your all too obvious confusion.

 

Sun, 01/22/2012 - 18:49 | 2087107 roy10
roy10's picture

There is no excuse for CDS not to be exchange traded. Not a single one.

Sun, 01/22/2012 - 19:10 | 2087137 ZeroPower
ZeroPower's picture

Yes. The dealers (read: MMs and their boss' inherent power over regulatory committees) want to CATCH THAT B/O

You have no idea how many times a MM in the credit world makes their week simply due to a day of high vol and gaining the increasing spread. Then, when low vol returns, youre a hero sitting on cheap inventory.

Sun, 01/22/2012 - 20:04 | 2087209 ekm
ekm's picture

Roy

There is one and it is big. The reason is that THERE IS NO RULE OF LAW. JPM and others make the law with congress and NY judges and will never lose anything.

If the game field was fair, your statement is correct. Anybody believes that the game is fair?

Sun, 01/22/2012 - 18:58 | 2087124 DutchR
DutchR's picture

Anyone compile a list?

 

 

 

 

Sun, 01/22/2012 - 20:49 | 2087264 UP Forester
UP Forester's picture

Big Sis did.

 

And, yes, you're on it.  Welcome to the Club!

Sun, 01/22/2012 - 19:07 | 2087133 ZeroPower
ZeroPower's picture

However, we do feel strongly that CDS should be exchange traded(more straightforward than ever given standardization, electronic trading increases, and clearing) 

 

But how on earth would C, BACML, and JPM be able to quote 10bp spreads on such 'illiquid' products like SovX or XOver if this went standardized??

Sun, 01/22/2012 - 20:40 | 2087258 Downtoolong
Downtoolong's picture

Large volume is not necessarily liquidity. Position and trade concentration is definitely not liquidity.  Liquidity, efficiency, and fairness in markets comes only when there are many market participants who are in it for different reasons, with different goals, objectives, and views.  A trading arena where three participants hold over 50% of the positions is not a market. It’s a recipe for disaster.

Sun, 01/22/2012 - 21:11 | 2087285 mogul rider
mogul rider's picture

400 quadrillion dollars of CDS is perfectly safe

trust me

Of course once the counter party fails well -that's another story.

I am constantly amazed at the idiocy of Wall street bullshit.

 

But that's why we hug our precious every night before we fall to sleep

 

right?

 

Sun, 01/22/2012 - 21:20 | 2087301 Flakmeister
Flakmeister's picture

Declare them to be null and void, run the premium payments in reverse and finally any upfront money is refunded. Any commisions are lost...

If you do not like the paper, don't buy it.....Let the real market decide what an entity can borrow at when there is not  the illusion the investors ass is covered....

BTW, When I was modeling them, I always wondered just what the reason was for a synthetic CDO made of CDSs.... took me a while, but I figured it  out....

Sun, 01/22/2012 - 22:30 | 2087437 ucsbcanuck
ucsbcanuck's picture

"I always wondered just what the reason was for a synthetic CDO made of CDSs.... took me a while, but I figured it  out...."

When I first read about the whole fiasco and the machinations of clowns like Wing Chau, I just could not believe it. WTF were they thinking - let's just keep writing this shit and "it's money for nothing and the chicks for free"?

Kinda sux, but I can't believe Wing Chau made as much as he did while things were going well, then when TSHTF he didn't have to pay fuck all. Or bugger all, si je te prefere. And US taxpayers picked up the tab.

Sun, 01/22/2012 - 23:56 | 2087511 mark mchugh
mark mchugh's picture

Using data from table 1 is pointless.  Table 2 is the table that matters, and if, "A similar analysis can be done using data from Table 2." then maybe somebody should fucking do exactly that, because Goldman and Morgan Stanley are commercial banks in name only (so that they can get CB goodies from the Fed, remember?).

MS and Goldman have HUGE CDS exposure not reflected here ($5.6T & 3T respectively).  So if you want the wrong answers, use table 1.

If you really, really want to find the right answer, compare tables 1 & 2 and take the higher number for each institution (BACs CDS exposure is $900B higher in Table 1).

Beyond that, to defend the CDS market as useful, is nothing short of pure idiocy.  The CDS market is predicated on the notion that inslovent banks can somehow make good on events like sovereign defaults.  Two words:  Bull and Shit!  The only thing the CDS market is useful for lazy-minded analysis of institutions & sovereigns (and yes, it works like a charm for that).

Mon, 01/23/2012 - 00:25 | 2087630 spekulatn
spekulatn's picture

Great great stuff ZH!

Mon, 01/23/2012 - 06:01 | 2088052 AntiLeMaire
AntiLeMaire's picture

"However, we do feel strongly that CDS (indices especially) should be exchange traded (more straightforward than ever given standardization, electronic trading increases, and clearing"

'Should be'? IMHO that's already in the bag.

Dodd-Frank was signed into law July 21th, 2010. Please check Title VII. It has been agreed (G-20) that the EU (etc) would implement rules similar to Title VII (see EMIR). The scope is most OTC derivatives contract forms (and certainly CDS).

So this has already been agreed to and will be implementend in the US (CDS are specifically mentioned). In the EU (EMIR) any CDS trade must at least be reported and cleared centrally, which mandates standarisation. The only question left open (to some extent) is whether CDS (et.al.) will be forced to be traded on exchanges in the EU.

But of course when these contracts are standardized enough to be automatically centrally reported & cleared, there is nothing stopping you from also trading these on proper exchanges. The only benefit of not trading these on exchanges is to be able to screw your customers out of more money. Of course most of the customers will realize this & will typically prefer anything offered via an exchange. So ...

 

Ceterum censeo OTC esse delendam

Mon, 01/23/2012 - 06:26 | 2088066 supermaxedout
supermaxedout's picture

If it would be not dead serious one could laugh out loud. Very funny somehow. 

The top five zombie banks guarantee each other to be good for ? How many trillions. I forgot, yeah its about:

15,000,000,000,000.- US Dollars. Is that much ? I dont know. Hope I got the zeros correct in this 15 Trillion.

And by the way, that this is appx the amount the US governement is in debt.

None of the zombie banks have money,  but their promise to pay in case something goes wrong is enough to give "green lights" for the auditors which are auditing the financial statements of these banks once a year in full. 

We are really living in extreme times, because under normal circumstances one could hardly find an auditor giving green light to such a "non existing" guarantee. In the old days the right hand of such an auditor would have been cut with the sword. If not the head. In these giant theft/fraud cases I really would prefer islamic law. These peaple are a shame for all hard working and honest auditors - which really do exist. No joke.

Mon, 01/23/2012 - 12:32 | 2089023 ucsbcanuck
ucsbcanuck's picture

And BAC goes from 5 to 7. Wait, WTF?

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