MS CDS - The Saga Continues

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors

Today, the CDS market is highly efficient. It is both liquid and ringing with endorsement for Morgan Stanley.  It is clear that the credit analysts, who once again are good predictors of the future, have done their homework and decided that Morgan Stanley is safe.

Without a doubt some of the concerns are being addressed.  With the imminent nationalization of Dexia, the potential for counterparty losses there have been addressed.  The resolve Europe seems to have mustered to prevent bank creditors from having any losses is also helpful.  Asia and EMEA where MS gets about a third of its revenues have rebounded nicely.  CMBS and credit products in general have rallied, also helping MS.  These are all valid points.

What I find "interesting" is that earlier this week, the CDS market was full of manipulative bears who were attacking an otherwise great company, that CDS was extremely illiquid, that you couldn't rely on the pricing, and that spread widening was forcing additional hedging.  Well, the CDS market is still populated by the same people as it was earlier in the week, it is no more or no less liquid.  The price discovery mechanism hasn't changed, and as the name has gone tighter, some people have found themselves over-hedged and are now forced to sell some protection into a tightening market, forcing it even tighter.

In full disclosure, I have only traded MS a few times this week, and it has always been from the long side, when I felt the stock movement was overdone.  My writing on the subject has been to try and provide some clarity and consistency and deeper look at what is driving the spreads.  To the extent the mainstream media laments how analysts or traders or websites "at the fringe" can attract a following, maybe they should review their own reporting of MS CDS earlier in the week, and their reporting now.  Some have done a good and fair job.  Too many, in my opinion, spent half their time disparaging CDS earlier in the week, and now avoid any mention of those same issues.  The nature of the market has not changed and valid issues remain valid issues and points that were just wrong, are still just wrong.

MS Stock hit a low of 11.60 this week, and a high of 15.50.  That is a move of 33% from the lows to the high.  CDS traded in an 8% range.  Using 100 strikes, the high print of 650 was a "price" of 78.4 and the tight print of 420 was a "price" of 86.2.  So if you had sold protection at the tightest level, and bought it back at the widest level (the worst trade you could have done), you only lost less than 8% of notional.  A horrible trade but a far smaller move than the stock had.  Once again, it does make me wonder why the CDS isn't being pushed onto exchanges where it can be transparent and cleared sooner.  The collateral should be manageable, and credit moving in an 8% range when the stock (junior in the capital structure) moves in a 33% range seems about right.

Anyways, I hope Europe works on some serious solutions this weekend, but takes into account the need to protect their sovereign ratings, or the plans fall apart.  If any of the 6 AAA guarantors get downgraded, EFSF will have to be re-sized smaller to retain a AAA rating, in spite of all the talk about levering it up and making it bigger.  Solutions have to be realistic and be done with the understanding that their are costs from any proposed solution and you can't just hide or bury losses without impacting someone.


ZeroHedge Update: MS CDS is leaking wider from the open today from 405/425 to 425/445 current.

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Piranhanoia's picture

The best way to destroy an insolvent pustule is to praise it.  

Cynical Sidney's picture

just to remind mr. tchir, morgan stanley is a pos that dimon didn't want when it was offered to him for free.

MS can hide their debts under fas157/159 moving losses off their balance sheet, but this charade will not last forever

oh_bama's picture

I am not exposed to CDS but if they are essentially puts on debts, they should have something like a 5 delta. So an 8% move is not that trivial if the underlying(not exactly underlying but anyway) moved 33%

Can someone correct me please?

GeneMarchbanks's picture

MS won't fall in a day... um it will fall one day soon but it'll take a few shots first.

DonutBoy's picture

Seriously?  The CDS market is efficient and open?  This is a joke.  The CDS market is OTC, with no clearing exchange, and no common disputed settlement mechanism short of a trial.  It is massively profitable to brokers because it's inefficient.  These are private insurance policies sold by firms who are not capitalized or regulated for selling insurance but would like the premiums nevertheless.


oh_bama's picture

What are you talking about?


Are you talking abuot the casino not able to pay your bets? WHAT A JOKE!~~

haibop's picture

the game between huge and tiny fish. Matt Huston Ex2

strannick's picture

[The CD Market is] private insurance policies sold by firms who are not capitalized or regulated for selling insurance but would like the premiums nevertheless.

Dont worry. The CD market along with other derivatives is regulated by the CFTC through its Commisioners and Chairman ; ; ; ;

Chilton, Bart

Likewise if there was any manipulations in the COMEX gold and silver market market which they also regulate, surely they would let us know?

If you have any concerns about the efficiency or sensibility of the CFTC's performance on derivatives and precious metals, be sure to email the Commisioners at the emails listed above. Dont hold your breath waiting for a reply, unless you work for a bank.

JR's picture

Speaking of The Saga, from AIG to Bank of America, the CDS market is nothing if it’s not “efficient.”

Bank of America has become a virtual financial nuclear waste dump where toxic materials from all over the criminal banking network can be deposited and, then, when BofA is forced to sink the toxins sink with it.

Bank of America, the largest retail banking establishment in 2008 with substantial real estate value, had repeatedly refused to play the bailout game until threatened by Fed Chair Bernanke and Hank Paulson, then U.S. treasury secretary cum Goldman Sachs CEO credentials.

And for BofA, it’s been downhill ever since.  And now every Wall Street-connected columnist, economist and blogger has joined in the “trample-them-while-they’re-down” strategy.

By now all of the investment bank sympathizers are praying that BofA will succumb to the rumors, law suits, threats and lies and will sink into oblivion to take their bad paper to the bottom.  Then, when the sun comes out and shines on the new Bank of America, its new owners will be the Goldmans and the Morgans—both JP and Stanley.

Here is how Mayor Bloomberg used Bank of America once again today as the bankers’ yom kipper (scapegoat) while reporting on the growing anti-Wall Street protests that have spread across the country from New York to San Francisco.

Protesters criticized the government for propping up hobbled financial giants, including Citigroup Inc. (C) and Bank of America Corp. (BAC), with a $700 billion taxpayer-funded bailout in 2008, while leaving Americans to struggle with unemployment, depressed wages, soaring foreclosure rates and slashed retirement savings.”

Then, when you click on Bank of America Corp. (BAC), the grinning (Mayor) Bloomberg shows you Bank of America’s plunging stock price.

As Ben Stein put it, the "nimble Goldman" (likening it to the KGB) never pays for its crimes.

Troll Magnet's picture

michael bloomberg is a douchebag. yeah, talk your game while sending out your dog hounds to beat up and arrest innocent & peaceful protesters. asshole...

ToNYC's picture


First oder of survival of any group is to expose the agent-provocateurs ready to oblique the weak and keep the old paychecks right on schedule.

mvsjcl's picture

Peter, you're still talking "solutions?" Really?

totem's picture

> Anyways, I hope Europe works on some serious solutions this weekend

"Hope?"  It sounds like someone is getting ready to run for president!

Linus2011's picture

rediculous to assume these eurocrats are doing anything good. the more they work on solutions for cross transfers, the worse it will get. especially for germany. whenever the "angry germans" step out of their holes and organize the whole european project will fall within 2 weeks.

PicassoInActions's picture

For those who bored with the slow market crash...


At least some1 was original


kito's picture

 It is clear that the credit analysts, who once again are good predictors of the future, have done their homework and decided that Morgan Stanley is safe.


so is zh posting an "in your face tyler" response regarding the stability of ms? not sure i understand. is peter saying that tyler didnt do his homework? that maybe tyler used cliffs notes?

slewie the pi-rat's picture

no, kito, but who can tell at this point in the week?

peter seems to have left off the <sarc> tags due to something dripping onto his keyboard...<sarcasm>?<

Quinvarius's picture

So they got a 0%loan from the Fed.

buzzsaw99's picture

does anyone want to buy a bazillion dollars worth of cds? i am selling at 10% below market. Anyone? Beuller?

Manthong's picture

No, but for only 2% of a bazillion I'll insure the guy that buys them from you against any defaults.

ToNYC's picture


Mortimer Duke buys from Randall Duke. All Your Rights Reserved.

Dr. Engali's picture

What I find "interesting" is that earlier this week, the CDS market was full of manipulative bears who were attacking an otherwise great company,

Otherwise great company? Seriously?


daily bread's picture

I'd like to set up a business to sell CDS.  Since the powers that be have arranged matters so that "credit events" can never again happen, it seems like an operation with no downside.

Youri Carma's picture

Will Morgan Survive?

A failure to learn lessons from the past is part of the reason why Rickards believes Morgan won’t be skipped over in the doomed list of dominos.

“I’m not picking on Morgan Stanley,” said Rickards. “I don’t think they’re more or less deserving than anybody else. I don’t think they’re any more badly managed. I just think they’re next.”

Read more:

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