Here Is Who Has Been Selling European CDS

Tyler Durden's picture

While it hardly comes as a surprise, Bloomberg last night reported that Italian banks are the culprits. The Top 5 Italian banks (which comprise 90% of the country's derivatives market) increased their net sold protection by an amazing 41% to the end of June, now standing at $24bn. Of course, there is no evidence of them selling protection on one another in a quid-pro-quo sense (a la Greece), but it seems the creation of carry out of thin air remains alive and well and given that every credit in the world is significantly wider no than it was on average through the first half of the year, we hesitate to guess at the MtM losses their trading desks are sitting on. What is even more incredible, and a topic we have covered vociferously, is the 13% rise in notional derivative amounts. We know full well, from every liquidity indicator, that USD funding is hard to come by for European banks which just makes us wonder, given the USD-denomination of European Sovereign CDS, how much easier it is to sell protection and gather USD cashflows, than to swap your EUR or stigmatize yourself with the ECB or Fed swap lines?

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oogs66's picture

Why not sell sovereign CDs on your own country. If you win, you win and if you lose you are screwed anyways

Hard1's picture

Yep, also all the shitty creditors want to buy protection on themselves to get a windfall when they default.

redpill's picture

Right, so net exposure is zero, all is well, nothing could go wrong.


By the way, I'm selling $1 million dollar life insurance coverage for $5 a week.  I mean, I don't have a $1 million to pay out, but we can pretend like I do, ok?

Just don't die.

WonderDawg's picture

Just when you think it can't get any more absurd. Nice analogy, Redpill, you nailed it.

TruthInSunshine's picture

"Buy 100 life insurance policies, name your pet gold fish, Nemo, as the beneficiary on all such policies, fake your own death, and then burn your neighbor's house down, rob a bank, and kidnap and hold hostage a CEO of one of the insurance companies you've purchased life insurance from."


-- Ben S. Bernanke (paraphrased); from Esoteric & Entirely Lunatic Rantings & Discourse on Modern Money Mechanics from the Mind of The Beard, Volume II

trav7777's picture

why don't countries just borrow money like crazy and then buy CDS on themselves and then default?

Hell, they can get coverage and just default'd be like shooting turtles with one of their feet nailed to the ground

Mudduckk's picture

The perverse incentives just keep getting more perverted.

A Man without Qualities's picture

Well, if the rumours are true, this is what Greece did.  Buy protection from stupid German and Italian insurance companies...  So you wonder why they were so insistent that a restructuring wouldn't trigger CDS?

redpill's picture

It all works marvelously until there's a claim, which is an itty bitty oversight on someone's part I'd say.

WonderDawg's picture

I thought it was pretty obvious why they were so insistent. CDS is the time bomb that we all know is ticking but no one wants to acknowledge.

chindit13's picture

The real beauty of CDSs is that there are two ways to win, and win big ©.

The first is as you suggest.

The second is to match your sovereign coupon with more than an equivalent amount of CDS writing.  Collect the premiums.  Use them to pay off the coupon on the debt you issue, which means you never have a "default event".

I'm sure there are Bavarian Landesbanks who would be years catching on to the scam.  In any event, this is hardly more foolish than an EFSF to bail out the PIIGS funded partly by the PIIGS themselves or an ECB than guarantees the debt of its members---letting them fund more cheaply---via a fund made up of contributions from EU members, and then "leveraged".

El Viejo's picture

Insurance companies might get a little suspicious if you try to buy life insurance on your neighbor. But who is the arbiter when CDS are sold?

TruthInSunshine's picture

Hank Pauson, Timmay & The Bernank.

It worked wonderfully for Goldy & JP Morgue when they took out stacked death insurance on AIG, Lehman & Bear Stearns and then put a bullet in their heads.

floridasandy's picture

i like j p morgue.

how about ghouldman sachs?

wandstrasse's picture

Just don't die.

they died long ago, but nobody cares, they just keep on paying the $5.

Market Efficiency Romantic's picture

hey, if regulation ever bothers you, I sell you a $2 re-insurance to take the potential liabilities off your balance sheet.

Mutatto's picture

I wouldn't worry about it.  If someone dies, you just say it was a non-event.



wandstrasse's picture

BTW, death is transitory.

redpill's picture

And "nobody" could have seen it coming.

El Viejo's picture

Problem diffusion. Credit Entropy.

Market Efficiency Romantic's picture

... or discuss the definition of death. That should work out, as long as you (the issuer) claims you have seen the person well and alive on the other side.

oogs66's picture

I like it. I might buy so long as you post pictures of my wife being shocked I left her nothing!

MayerRothschild's picture

It's 'life' insurance... Just void when they die.

Chicken_Little's picture

This situation is similar to an old horror movie where a demented son kept his dead mother in her living room chair for years and refused to accept her demise. In this case if anyone finds the body it would trigger trillions in derivatives so nobody goes in the house.

Sizzurp's picture

That's the dirty secret of this entire derivitive mess.  Sure you can go long the CDS's, but good luck getting paid by your counterparty when a credit event happens.  Especially when it is the very counterparty that is defaulting.  Flat broke is flat broke.  Of coarse these rules don't apply to Vampire Squid, where upon the taxpayers will cover it at 100 cents on the dollar thanks to Timmay.  Everyone else who thought they were hedged, guess what, go to the end of the line with all the other screwed creditors and suck some wind.

anonnn's picture

Just don't die?

Post-VietNam conflict, some of "the very best" life insurance co.s lobbied the Pentagon [by covertly setting-up the very survivor groups they encouraged to do the lobbying] to declare all Missing-In-Action all personnel who could not be proven to have been killed...i.e., any possible doubt meant MIA, not KIA.

The result? The families had to continue paying the insurance premiums,  familyon and on, until courts or Pentagon declared death by old age. The families paid for many years.

Manthong's picture

(Bank) corporate and state fascism have converged.

Folks have found ways to deal with the fascism issue in the past.

maddogs's picture

Did not work out so well with 'Voluntary Greek' situation.

surfersd's picture

So they are going "short CDSs" ?!? Going longer more of their own debt? Who are the counter-parties and what are they thinking about the counter-party risk from they party is selling them. 

Do you think that the FED will come in and bail out the counter-parties like they did for GS during the AIG wash-out.  just saying...... 

hugovanderbubble's picture

CDS Market is non sense as u will never obtain the CREDIT EVENT NEVER HAPPENS ....

Just a waste of time

But ISDA regulators still there with their job...F:UK THEM


ZeroPower's picture

Credit events happen regularly just fine in the corporate space. Due to the intricacies of sovereign nations and their CBs meddling in financial affairs, its not as straightforward, even though sov CDS have been 'hit' before.

GeneMarchbanks's picture

'Credit events happen regularly just fine in the corporate space.'

Yep. See EFSF setting up 'voluntary' partial default as example. ISDA debating the semantics of default. Someone call a semiotician!

jm's picture

How is the EFSF in the corporate space?  You're totally missing ZP's point.  You never see these games on a corporate name.

These banks are strategically selling CDS on the holdings of gov securities because it locks their treasury/ECB into another bailout. 

The only way to fix this moral hazard is nationalization after liabilities are settled in bankruptcy.


GeneMarchbanks's picture

So perfect. All is proceeding according to plan then.

Appreciate that you pointed it out.

Market Efficiency Romantic's picture

What I don't get, the situation of sovereign debt was never really clarified and is IMO a total mess. Theoretically sovereigns cannot default and banks argue exactly this way. If so, how do you argue different risk premia. And how do you handle the semi-sovereign situation in the EUR zone? Any separate CDS issuance on EUR semi-sovereigns should have alarmed governments from the beginning, as they can be used for something like a political arbitrage game. Markets just identify arbitrage opportunities very quickly. Just having ISDA not declare a default won't do, as the gaps in the markets only widen and with an unclarified situation very rapidly lead to claims that have pretty extinctive power.

Not paying these claims will dry sovereign credit markets immediately, serving them will require sovereign states to backstop their financial systems with amounts that entirely kill their solvency. So, its either total stupidity not to clarify the situation at one point or a calculated game leading to insolvency one or the other way.

jm's picture

CDS are designed by dealers for dealers doing warehousing and flow business.  There is a small chunk of business done by some others that are taking risk exposures.  You are looking at this from the latter perspective.  Dealers taking the former view have a complicated web of short/long exposures that is altered every day.

IMHO, most EU dealers are so dependent on ECB and subsidies to stay viable that they didn't complain when the idiot bureaucrats interfere with determination.  Since dealers are such a big piece of the market, the rest don't really have a say.  The idiot bureaucrats are so stupid that they can't even see that banks can game them by increasing exposures that necessitate even more subsidies.  Government intervention and all "regulators" are useless excpet to put taxpayers on the hook. 





Market Efficiency Romantic's picture

I get your point, but that's only what I assume. In abstract terms, if there are no more asset holders to finance your debt, you virtualize it by allowing hedging and leveraging of debt issuance only to be repaid (backstopped) by the taxpayer in the future.

So what is constitutionally illegal to just spend witout actually available financing has become legal through regulation and financial engineering that is neither understood by the general public nor by the judicial power,

As stated below, everyone gets what he/she wants, politics get their spending and bankers their fees and the sheeple their burden.

jm's picture

I would say in abstract terms that the point is to make your inventory less risky so that your capital requirements are lower.  CDS allow you to gear down risk because you can pass the credit risk to someone else. Again, from the flow/bank perspective.  They are really not so revolutionary as some people think.  It is just an option, and dealers are the bookies that print risk-neutral "odds" that even out the money on both sides of the trade so they can live off the skim.

State intervention is what creates the problems you correctly identify because they create incentives for people to exploit their stupid decisions.  This is most obvious in Europe, the guys running that show are absolutely clueless as to the issues and don't have the energy and intelligence to figure it out.  They accept at face value what a bank tells them is the right course of action, or make conflicted, irrational emotional decisions to appease voters for a short period of time.  The people that could actually offer the painful honest solutions are blamed for all the problems by these hollow stuffed incompentent men, and voters never stop trusting these lying scum. 




fourchan's picture

especially when the risk makers as well as the insurers of that risk have

bought the government who will force the innocent taxpayers to pay them

both when they both default on their bogus scheme.


the masses are still ignorant and asleep.

whstlblwr's picture

State intervention creates problem, LOL, not cheating lying fucks. Aren't you person who tells us taxpayer has no choice but to bail out these corrupt banks that gaming system right now. We must save them to save ourselves. Yeah right.

We don't have to bail you out. And soon we won't.

jm's picture

The only way to fix this moral hazard is nationalization after liabilities are settled in bankruptcy.

Another commenter was right.  Leave the brain work to others.

whstlblwr's picture

LOL, you show yourself. This is your quote:

"State intervention is what creates the problems you correctly identify because they create incentives for people to exploit their stupid decisions."

Right, it's the state, not the corrupt bankers where I'm guessing you belong.

Also this from other day, you said, "I think the downside to allowing massive default is worse than the downside of trying to inflate our way out of the problem."

You care more of your "paper" than our country imo

Market Efficiency Romantic's picture

Or, as I was made aware of by the head of the German economic advisory board, who is buying CDS on the US. Well, in real life, that's BS, there will never be a US credit event declared. The entire meaning of sovereign CDS is leveraging up the balance sheet. If a CDS protects your exposure and eliminates your risk, you can enter more risk and hedge itm enter more risk... and achieve a 50x leverage... without any risk. Yeah right.

As has been the default definition, the balance sheet risk regulation is a joke, much appreciated by the debt issuing sovereigns. Hey, need more debt... no, too much risk on the balance sheet, well then secure risk and take up more.

It's politics demanding debt and providing a BS regulation and bankers providing financing and taking provisions on the 50x leverage. Isn't that a win-win-situation?

Ghordius's picture

"The entire meaning of sovereign CDS is leveraging up the balance sheet"
The Event is irrelevant.

hugovanderbubble's picture


Im trying to be ironic about " SOVEREIGN EUROPEAN SINGLE COUNTRY CREDIT EVENT"- example Greece, Ireland or Portugal

As GeneMarchBanks says..its all about SEMANTIC/WORD/LEGAL RISK....





willien1derland's picture

Technically speaking you can also create a self-fulfulling event which ensures the sovereign loses but you (bankster) wins - great point oogs66 - and if you buy into the EuroBond camp  all the better because the parasite banks accelerate the loss of sovereignty by consuming the host country in an act of treason which is funded/supported by the host... 

Buck Johnson's picture

This is so funny, truly funny.  Now we know the whole system is screwed, they might as well default now than later.

hugovanderbubble's picture

ASEAN BANKS DENIES FUNDING TO FRENCH BANKS remember.....(socgen,groupama,creditagricole,bnp)....

Racer's picture

French PM says will do whatever it takes to keep AAA rating

Soooo he is going to sell his soles to the devil and ask the Martians for their initial promised tranche of funding?