CDS

CDS

BP's Bankruptcy Would Impair 117 (18% Of Total) Collateralized Synthetic Obligations, Lead To Pervasive Losses

Even as increasingly desperate falling knife catchers try to convince someone, anyone to buy up some or all of their shares of BP stock, which is certainly on its way to a guaranteed doubling, tripling or more, the real investing community is ever more carefully looking at the worst case, and its implications. Said implications would be vast, and in addition to wiping out billions in capital from BPs direct counterparties which are already limiting their BP exposure, a topic we touched upon briefly previously, would also impair indirect holders of pre-packaged securitized BP exposure. Today Moody's provides an analysis of which CSOs (just like CDOs but packed purely with synthetic products - think Goldman's Abacus) would be impaired should BP go bankrupt. The rating agency does not stop there, and also analyzes what a bankruptcy of BP peers Halliburton, Anadarko Petroleum, Transocean Inc., and Cameron International would look like, and who would be wiped out. Below are the results, which upon further analysis will likely indicate total loss potential well beyond BP's total outstanding debt exposure.

China's Trade Balance By Country, And Why The FX Action Is Less Of A Deal Than The Media Will Have You Believe

As every kitchen sink appears to have a definitive opinion on the impact on the CNY rebalance, we would like to step back for a second and present a historical chart of the country's trade balances not only in total, but by individual country. As the chart shows, and as David Rosenberg also highlights, providing a blanket summary as to the impact of a CNY revaluation is a rather foolhardy thing: while China may enjoy a positive trade surplus with the US and EU, it certainly has a trade deficit with some other key producer countries, namely Korea ($61 billion LTM), Japan ($47 billion), Taiwan ($79 billion), and Australia ($27 billion). So while it could be argued that the US and EU's manufacturing sectors benefit from a stronger Yuan, what happens to the exports of the traditional Chinese partners? Absent the PBoC going full tilt and scaling up its imports across the board, there will be some very unhappy traditional Chinese trade counterparts. Although in this age, when even presumably smart economists beckon to "Spend now, save tomorrow", why bother with something as simple as the Capital to Current account equality. China should buy up everything, and use reverse money or something to then reinvest the reverse proceeds from all the exports into sovereign bonds... or something.

BP Finalizing 5-10 Year, $5 Billion Unsecured Bond Offering, 8-10% Yield

Just reported on CNBC. The yield on the issue is massive and is certainly a means to encourage basis traders to cover their naked CDS positions at a profit. Look for 5 year CDS to widen to the neighborhood of the new issue spread. BP better hope this is all the liquidity it will need, as the next bond offering will have to come at 10-15%, the third even wider, etc. By then, of course, there would be no equity value left.

10yr approaching breakout

Treasuries, employment, manufacturing data, Spain, head & shoulders, BP, PIMCO, & World Cup... All in one.

A Morgan Stanley Clarification

Two days ago, we posted a story titled "Why VaR Is A Joke: Morgan Stanley Admits Losses in April And May Were "Much Higher" Than Anticipated" in which we extracted a segment from a report by Jim Caron to claim that VaR models are broken beyond fixing. Today, Morgan Stanley has asked us to provide a clarification on our post. We gladly comply.

Tyler,
The comments from Jim Caron that you reference in this article concern a model portfolio maintained by Morgan Stanley Research.  This fact isn't clearly reflected in the headline or in the article.  The headline in particular suggests that the Firm is disclosing losses.  This is not the case.  Again, Caron's comments concern a model portfolio within Morgan Stanley Research.  Please let me know if you can clarify this in an update, and let me know if you have any questions.

Thanks,
xxx
Morgan Stanley | Corporate Communications

We hope this clarifies everything.

Jim O'Neill Explains Global Economics Through The One Thing He Knows Well: Football

The Red Knights' attempt to buy ManU may have ended, but that won't curb the Goldman's BRICster's enthusiasm for all thing football. In his most recent Rose-Glassed commentary, Jim O'Neill explains why the world is great in 8 simple world cup parables, for all the ADDed traders who spend about 10 times as much time watching football than actually trading. Yet even the permabull is unable to contain himself in calling out the EU, ECB and the IMF in their Stress test hypocrisy: "The UK, the economy, the FSA, fiscal policy, and (oh dear), the team plays again tomorrow……..With a bit of luck, I wont be able to watch the match against Algeria which, if it is anything like the last one, will be much worse than a Spanish bank stress test…." Jim, you missed the news that according to the regulators in your favorite Europe, Santander is the healthiest bank in Europe. You have nothing to worry about: England should win by the same credible one thousand-nil, as the STD news.

Daily Credit Summary: June 16 - Spain, Pain, And BP's Bane

Stress in the Spanish banking system is nothing new but with DS-K swooping in this week from the IMF, and the oh-so-trustworthy Stress-Tests due to be announced, anxiety was running high as Spain sovereign risk broke back above 250bps and BBVA and Santander struggled wider and flattened (CEE sovereigns also floundered today). Of course, far more importantly, World Cup favorites Spain lost their first round football match to the Swiss 1-0 (shame I hear you all cry).

Trading In BP CDS Explodes By 60% In One Month

According to DTCC, net notional outstanding in BP CDS as of June 11 was $1,676 million, based on 2,072 (great error-proofing there Reuters) contracts. This represents an increase of about 30% from the prior week, when net notional was $1,284 million and 1,718 contracts. Most notably, however, the increase is about 60% from $1,066 million and 1,399 contracts as of May 14. The 60% ramp up in CDS "hedging" is to be expected, now that PIMCO has gloriously entered the water. Of course, since nobody has used CDS to hedge positions since about 2002, this simply means that bets on a default in BP have surged. Observant readers will say this is the dumbest way to conclude this, when one can just look at the price of 5 Year CDS, which has exploded in the past month. These readers would be right.

CDS Traders Finally Give UK Reprive, Focus On Heart Of Darkness: Germany And France

For the first time in over 2 months, last week CDS traders ignored their ongoing derisking barrage in Great Britain CDS, and instead shifting their attention to the very heart of European darkness, the two countries that are in charge of it all - Germany and France. There was over 750 million worth of German CDS derisked, in 58 contracts, with France close behind at $728 million. Two other notable names rounding out the top five were Turkey and Spain. Quiet, little Finland was there for some reason. Other name filling out the list of top 10 were Brazil, Ukraine, Korea, Portugal and Japan: all names that have very valid reasons to be concerned about their future, and CDS traders agree. On the other end, rerisking was rampant in Mexico, Slovenia, Holland, Indonesia and Thailand. Most likely these are just hedge pairs as there is no reason why any of these names should be in play. Two names which we will focus on shortly, Romania and Bulgaria, were in no man's land. We expect they will slowly migrate toward the red part of the chart.

BP CDS Curve Goes Nuts, 1 Year Passes 1,000 Bps, No Offers In Market

The BP Curve has really flipped (out). The 1 year point on the curve is now over 1,000 bps, a 400 bps move in one day. The point is also offerless (bidless in traditional cash jargon). Granted the DV01 so close to 0 is rather low, but this kind of ridiculous curve inversion is simply wreaking havoc on correlation desks. The 6 month point is now 0.5 pts upfront. Pretty soon BP will need to apply for the same ECB bailout that rescued all those banks who were risking a wipe out when Greek spreads were trading at comparable levels. The question now becomes: who sold the bulk of the BP protection? BofA's announcement yesterday that it is limiting counterparty risk exposure with BP to all contracts over 1 year could be a rather material clue as to the identity of at least one such entity.

US Revises Estimate For The BP Oil Spill Higher For Third Time, Now At 35,000-60,000 Per Day As BP Cries Foul Over Counterparty Exposure

The US government has revised its estimate for the daily oil spill for the third time, now decidedly higher than the last iteration which was at 25,000-40,000 barrels per day. The latest estimate puts the high end another 50% higher, at 60,000 barrels. If this is indeed the case, it means that the amount of oil already having leaked could be as high a 3 million barrels, or 12 times the amount spilled in the Exxon Valdez. Whether this means that the previous estimate of a total possible BP liability and other payments of $80 billion have to be adjusted higher once again, is still unknown. We hope the president's speech at 8pm will provide some more clarity on whether or not today's BP CDS Spread around 500 is justified.

Why VaR Is A Joke: Morgan Stanley Admits Losses in April And May Were "Much Higher" Than Anticipated

Zero Hedge has long contended that risk models based on VaR "predictions" are flawed and only add to systemic instability due to the ever increasing correlations across all asset classes. We now read a first hand mea culpa from Morgan Stanley's Jim Caron, in which the head of the firm's rates strategy highlights precisely this problem: the complete collapse of predictive models when multiple sigma events like the May Flash Crash and the accelerating sovereign collapse of the past several months occurs: "April and May were difficult months for us and others, judging by fund data on market performance. We did not properly discount the risks associated with peripheral Europe. As a result, we had a larger risk exposure than we should have. We measure the return potential for our positions on a per-unit-of-risk basis, similar to a Sharpe Ratio. That unit of risk turned out to be much higher than we anticipated. This will force us, and many others, to right-size our risks." We wish we could agree with the last statement. Alas, each and every risk management group at comparable prop trading desks (to that of Morgan Stanley), will undoubtedly chalk off recent events to chance, and as these "will never recur", business we will promptly return back to normal, until we see another record crash in the Dow, only this time not 1,000 but multiples thereof.