CDS

CDS

As Ambac Files For Chapter 11, Fed Is On The Hook With $10MM In Short CDS Exposure

Ambac Financial Group has just filed for Chapter 11, using a filing which is so fresh it even forgot to lock the input forms (see attached). The case is 10-15973 in Southern District of New York. The actual filing is not surprising, as we noted earlier that Ambac was likely going to file imminently. What is also not surprising is that the form 1, erroneously, lists assets of between 0 and $50,000 and liabilities of over $1 billion, even as Exhibit A clarifies assets as $394.5 million and liabilities of $1.6824 billion. Obviously someone was in a rush. Keep in mind this is a stock that Cramer was previously pitching to his very few viewers. Ambac's bankruptcy lawyers are Dewey and LeBoeuf, and Blackstone gets the coveted role of financial advisor. None of the relevant unsecured creditors have been disclosed as most are in DTC form, with BNY listed as custodian. Yet one definitive loser in the Ambac bankruptcy is none other than 'our' own New York Fed. As the Maiden Lane I holdings list as of June 30, when the Fed consumed Bear Stearns most toxic 'assets' and gave Jamie Dimon a clean sheet to buy the clean stripped bank for $10/share, it also adopted a bunch of Ambac CDS. And as of June 30, the Fed held $10 million in ABC CDS. Now that there is a credit event, it will be impossible for the Fed to continue claiming that its rescue portfolios are doing just swimmingly (or so we hope, for BlackRock's sake). Furthermore, the Fed will be forced to payout on the CDS which will likely end up pricing in the settlement auction somewhere very close to zero, implying a near total wipe out on the entire $10 million in short CDS. And lucky Fed: as of March 31, the Fed had actually held a net $50 million in ABC short protection, so in Q2 it covered $40MM worth of short protection. So now all eyes turn to Ambac soulmate MBIA... where the Fed is short $84 million worth of CDS.

When Irish Curves Are Splining: How To Arb (And Profit) From Unsymmetrical Irish Cash/CDS Curves

As we pointed out earlier, the Irish 10 Year just hit an all time high of 503 and has continued leaking higher. The main catalyst according to several trading desks is the following RIA Novosti report which says that Russia, demonstrating far more prudence than a recently insane China, has stated that it is excluding Ireland and Spain from possible sovereign wealth fund investments: "Russia has excluded debt-saddled Ireland and Spain from the list of
countries whose securities can be used as investment targets for
Russia's sovereign wealth funds, the Finance Ministry said on Wednesday
. The Finance Ministry, which posted the respective orders on its website
on Wednesday, said it had shortened the list of sovereign wealth fund
investment "to reduce risks in the process of the funds' management." It appears Russia is gearing for the inevitable jettisoning of a peripheral Eurozone country now that Europe will be forced to take drastic measures to lower the euro following today's QE2, something China appears to not be able to grasp just yet. And while the Irish cash treasury curve is getting increasingly flat, it is still upward sloping. Which is more than one can say for the CDS curve, which just like Greece, went inverted, and the 10 Year is now trading 40 bps inside the 3 Year. Which brings us to our trade recommendation of the day: just like in Greece cash was slow to catch up to synthetic, the expectation is that both curves will eventually overlay. However, as Greece taught us playing cash/CDS basis trades can result in some very dramatic liquidity induced flame-outs, we suggest sticking to either product on both sides of the hedge: namely - establish a cash flattener (sell 10 Year at 7.462%, buy the 3 Year at 5.330% for a pick of 210 bps), hedged with CDS steepener (sell 3 Year at 559 bps, buy 10 Year at 515 bps, for a net of 45 bps), both on a duration neutral basis . Assuming both curves pancake, one would stand to make about 165 bps. Of course, a simpler trade is just to put a flattener on for 3s10s cash.

S&P Estimate Of Dodd-Frank Costs On TBTF: Up To $22 Billion

S&P has released its first official estimate of what it believes the cost of Donk will be on the Too Vampiric To Fail. In a nutshell, the range of various costs could be as high as $22 billion, due to a drop in debit fees, lower derivative income, FDIC DIF replenishment, prop trading, and new compliance expenses. Additionally S&P expects another $85 billion in additional required Tier 1 Capital (which is a joke compared to its Tangible Common cousin). One thing is certain: just as Grayson yesterday said that nobody has any idea about what the charges associated with foreclosure and MERS-gate, and all are merely guessing, the same thing can be said of S&P. It is without doubt that the final outcome of Donk will either cost nothing or infinitely more. Yet for some reason this report made the headlines, so we present it for those 3 readers who actually care what S&P has to say.

MetLife Announces Foreclosure Delay In Judicial States

Next up Genworth, Allstate, Hartford, and Prudential. What's that? You didn't think they have exposure? Well, oops. A short in either the stock or, as credit trader notes, the CDS (either naked or paired against IG) in a basket of the various multilines may not be the worst idea here.

Chris Whalen Welcomes Our New Tyrannical Overlords, Prepares For The Taxpayer Funded Mortgage Insurer Bailout

Chris Whalen's latest Institutional Risk Analytics is a must read letter as it highlights yet another aspect of foreclosure fraud, one which finds various analogues in the way the MBS originating banks took advantage of AIG, knowing full well it was stuffed to the gills with worthless pieces of paper and taking out enough insurance on it to require a federal bailout when mark to fraud failed and mark to market finally worked for a very short period of time. Now, it seems, it is the mortgage insurers turn: "So today the MIs are still operating, though they are not providing insurance because they can't. Observers in the operational trenches tell The IRA that virtually no MI claims are being paid - even if the claim is legitimate. The MIs are very undercapitalized and still bleeding heavily. But they get continued business because the GSEs demand MI on high LTV loans. Lenders are forced to use the MIs and consumers are made to pay the premium. Thus the auditors of the GSE continue to respect the cover from the MIs, even though the entire industry is arguably insolvent." The question is how many CDS have Goldman et al purchased in bulk in anticipation of the imminent wholesale MI Event of Default, which will force Geithner to once again use the Mutual Assured Destruction wildcard and force taxpayers to bail out those holding MI insurance, especially if the originators and servicers end up being one and the same...

Greece Caught Lying By Eurostat Again, As Budget Deficit Revised From 3% Initially To Over 15% Of GDP

It is settled: the only country that may have more pathological liars than the US, is Greece. Eurostat, whose revision of Greek GDP numbers in April was the catalyst that led to the country's insolvency and riots in early May, and subsequent bail out, is on the scene again, and has once again confirmed that Greek authorities can be relied on 100%... to lie. Reuters reports that Greece's much-revised 2009 budget deficit will be set "once and for all" by Eurostat at above 15 percent of GDP, the country's finance minister said on Wednesday. And the revision is certainly a little more than just "modest": "Remember the 2009 budget was projecting a deficit under 3 percent, then a few days before the (Oct. 4) election the reported deficit to the EU Commission was 6 percent," Finance Minister George Papaconstantinou told a conference in Cyprus. "We realised it was over 12 percent. And actually, even after the final revision by Eurostat ... which will validate Greek numbers for 2009 once and for all, it will be above 15 percent. We are talking about a five-fold difference." This is data fudging that will make not only China but the BLS blush with envy.

Arbing Refi And High Dividend Event Risk

Bernanke's transfer of capital from savers to corporations, courtesy of now perpetual ZIRP and trillions in upcoming QE, has made corporate refinancing for high grade companies a no-brainer. With Goldman issuing 50 year bonds at just over 6%, one can be sure that many companies will take the inflation call option and continue to refi existing IG debt into ever lower yields, courtesy of schizophrenic investors who are betting on both inflation and deflation (why else would someone lock up capital for 50 years even as the S&P trades at 2010 highs?). However, in addition to merely refinancing, banks are now also also eagerly incurring new debt for shareholder friendly activities. So what does that mean for investors who are obviously much more comfortable with putting their capital into bonds than stocks (23 weekly outflows from mutual funds)? Well, there's an arb for that.

Reggie Middleton's picture

Wall Street responds to my missive on the potential of concentrated derivatives risk blowing up the banking system. Traders, salesman and financial engineers chimed in, and made some cogent points. Of course, I must rebut. It is the actual rebuttals that are probably more stinging than the original article - particularly the one concerning hedge funds. Please read on and feel free to chime in. Don't forget to bring the "Fiery Sword of Truth!"

Gonzalo Lira on Mulligan Mortgages—The Banks' Only Way Out

We’ve seen this movie so many times already, we can practically recite the ending: The Too Big To Fail banks are once again in the middle of another crisis—another mortgage crisis—that’s breaking like a bad rash. And this new scandal has so many moving parts!
Robo-signings!—Foreclosure mills!—Forged documents!—Attorneys General huffing and puffing!—Too Big To Fail banks tottering!—Foreclosures suspended!—Bond holders freaking out!—Credit default swaps shooting the moon!—Aaaaaahhhh!!!!! Again. As I explained in a long piece discussing the current Mortgage Mess, all of these different issues are all symptoms of the same disease: The Mortgage Backed Securities—America’s Herpes: The gift that just keeps on oozing. - Gonzalo Lira

Financial CDS Spreads Explode

The bloodbath in fin CDS is even worse than what is going on in equities. Bank of America is currently at the widest it has been in 2010.The latest rack is provided below, and the LTM 5 year Sr CDS spread is charted below. Yet the biggest bloodbath continues to take place in woefully underreserved HR Block, which is certainly not too big to fail, and which was about 30 bps wider on the day, now at 720/691. On the chart below, HRB's spread is on the right axis. Will the little tax preparer that almost could be the first casulaty that sets off the TARP 2 starter pistol?