Comments on: "‘Lopsided’ CDS market poses danger" http://www.nakedcapitalism.com/2008/03/lopsided-cds-market-poses-danger.html Sun, 22 Nov 2009 14:37:59 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Ginger Yellow http://www.nakedcapitalism.com/2008/03/lopsided-cds-market-poses-danger.html#comment-5109 Ginger Yellow Thu, 13 Mar 2008 16:55:00 +0000 http://www.nakedcapitalism.com/2008/03/%e2%80%98lopsided%e2%80%99-cds-market-poses-danger/#comment-5109 Basis trades introduce counterparty risk, for a start. Everyone's nervous about that at the moment. Basis trades introduce counterparty risk, for a start. Everyone’s nervous about that at the moment.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/03/lopsided-cds-market-poses-danger.html#comment-5105 Anonymous Thu, 13 Mar 2008 16:49:00 +0000 http://www.nakedcapitalism.com/2008/03/%e2%80%98lopsided%e2%80%99-cds-market-poses-danger/#comment-5105 Maybe eliminating CDS's as form of insurance(as the market presently seems to be doing ) is a good thing. I'm not aware that operating companies(companies that sell real products or services) find it practical to "insure" trade receivables that don't involve foreign currencies. This is due to the fact that there are too many variables(level of product quality for a particualr transaction, vendor/customer relationship health,etc.) to be evaluated by a potntial insurer. One can borrow against some percentage of the receivables. One can also employ factoring, but this usually requires either repo agreements, high factoring costs or both. Because of this, the lender/originator (product seller) usually is also responsible for knowing his customer and following through on collections. Therefore, good companies use this process to filter the lousy risks out of the equation. CDS's seem to imply that the insurer can quantify all of the underlying variables associated with a particlular transaction, and have enough first hand knowledge to follow through if non-performance occurs. I think what we're prsently seeing in the markets directly contradicts this asumption about CDS's. Maybe eliminating CDS’s as form of insurance(as the market presently seems to be doing ) is a good thing. I’m not aware that operating companies(companies that sell real products or services) find it practical to “insure” trade receivables that don’t involve foreign currencies. This is due to the fact that there are too many variables(level of product quality for a particualr transaction, vendor/customer relationship health,etc.) to be evaluated by a potntial insurer. One can borrow against some percentage of the receivables. One can also employ factoring, but this usually requires either repo agreements, high factoring costs or both. Because of this, the lender/originator (product seller) usually is also responsible for knowing his customer and following through on collections. Therefore, good companies use this process to filter the lousy risks out of the equation. CDS’s seem to imply that the insurer can quantify all of the underlying variables associated with a particlular transaction, and have enough first hand knowledge to follow through if non-performance occurs. I think what we’re prsently seeing in the markets directly contradicts this asumption about CDS’s.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/03/lopsided-cds-market-poses-danger.html#comment-5089 Anonymous Thu, 13 Mar 2008 12:14:00 +0000 http://www.nakedcapitalism.com/2008/03/%e2%80%98lopsided%e2%80%99-cds-market-poses-danger/#comment-5089 "they have 11-12% GDP growth and 7% inflation, so despite the talk of how the place is booming, I suspect it is concentrated in the coastal cities and not widely shared, since real GDP growth isn't all that robust by emerging economy standards"<br/><br/>What are you talking about? The 11+% growth China has IS real (adjusted for inflation). I expected a better level of understanding on this blog than you have shown.<br/><br/>I can only find Slovakia, Qatar, Oman and Bahrain (among reasonable size countries) with higher real GDP growth - that seems pretty robust to me. “they have 11-12% GDP growth and 7% inflation, so despite the talk of how the place is booming, I suspect it is concentrated in the coastal cities and not widely shared, since real GDP growth isn’t all that robust by emerging economy standards”

What are you talking about? The 11+% growth China has IS real (adjusted for inflation). I expected a better level of understanding on this blog than you have shown.

I can only find Slovakia, Qatar, Oman and Bahrain (among reasonable size countries) with higher real GDP growth – that seems pretty robust to me.

]]> By: Noel http://www.nakedcapitalism.com/2008/03/lopsided-cds-market-poses-danger.html#comment-5088 Noel Thu, 13 Mar 2008 11:58:00 +0000 http://www.nakedcapitalism.com/2008/03/%e2%80%98lopsided%e2%80%99-cds-market-poses-danger/#comment-5088 Anonymous said...<br/><br/> Noel,<br/><br/> Hos is the firm selling you the protection on the single name supposed to hedge that position?<br/><br/> Go short some bond that trades by appointment?<br/><br/> Buy a CDS on an index and hope all those correlatoin papers written in 2004 were actually true?<br/><br/><br/>Anonymous, <br/><br/>I am speaking from perpective of a market maker so they will hedge by selling/buying to keep their net notional reasonably flat.<br/><br/>wrt to indices and correlation - not sure if you are getting them confused with CDOs? Indices are linear - you can hedge with duration weighted underlying basket of names.<br/><br/>The single names in an index are getting dragged wider by the indices - see BAA and their determination to stay out of the S9 ITRAXX. Single names are much less liquid.<br/><br/>Take your point about basis trade - it is not a great way to hedge. Anonymous said…

Noel,

Hos is the firm selling you the protection on the single name supposed to hedge that position?

Go short some bond that trades by appointment?

Buy a CDS on an index and hope all those correlatoin papers written in 2004 were actually true?

Anonymous,

I am speaking from perpective of a market maker so they will hedge by selling/buying to keep their net notional reasonably flat.

wrt to indices and correlation – not sure if you are getting them confused with CDOs? Indices are linear – you can hedge with duration weighted underlying basket of names.

The single names in an index are getting dragged wider by the indices – see BAA and their determination to stay out of the S9 ITRAXX. Single names are much less liquid.

Take your point about basis trade – it is not a great way to hedge.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/03/lopsided-cds-market-poses-danger.html#comment-5085 Anonymous Thu, 13 Mar 2008 10:14:00 +0000 http://www.nakedcapitalism.com/2008/03/%e2%80%98lopsided%e2%80%99-cds-market-poses-danger/#comment-5085 Noel,<br/><br/>Hos is the firm selling you the protection on the single name supposed to hedge that position?<br/><br/>Go short some bond that trades by appointment?<br/><br/>Buy a CDS on an index and hope all those correlatoin papers written in 2004 were actually true? Noel,

Hos is the firm selling you the protection on the single name supposed to hedge that position?

Go short some bond that trades by appointment?

Buy a CDS on an index and hope all those correlatoin papers written in 2004 were actually true?

]]> By: a http://www.nakedcapitalism.com/2008/03/lopsided-cds-market-poses-danger.html#comment-5081 a Thu, 13 Mar 2008 09:04:00 +0000 http://www.nakedcapitalism.com/2008/03/%e2%80%98lopsided%e2%80%99-cds-market-poses-danger/#comment-5081 This is yet another good thing. These hedge funds traded in risky assets, yet expect other people to ensure their risk. Their feelings of entitlement extend beyond the right to large pay, I see. This is yet another good thing. These hedge funds traded in risky assets, yet expect other people to ensure their risk. Their feelings of entitlement extend beyond the right to large pay, I see.

]]> By: Noel http://www.nakedcapitalism.com/2008/03/lopsided-cds-market-poses-danger.html#comment-5080 Noel Thu, 13 Mar 2008 08:29:00 +0000 http://www.nakedcapitalism.com/2008/03/%e2%80%98lopsided%e2%80%99-cds-market-poses-danger/#comment-5080 Anonymous said...<br/><br/> There is no arb process available to keep CDS prices in line.<br/><br/><br/>Surely the arb process that is dragging CDS single name wider is people buying protection on single name and selling protection on the index?<br/><br/>Why can you no longer do a bond/cds basis trade? Anonymous said…

There is no arb process available to keep CDS prices in line.

Surely the arb process that is dragging CDS single name wider is people buying protection on single name and selling protection on the index?

Why can you no longer do a bond/cds basis trade?

]]> By: Anonymous http://www.nakedcapitalism.com/2008/03/lopsided-cds-market-poses-danger.html#comment-5073 Anonymous Thu, 13 Mar 2008 05:39:00 +0000 http://www.nakedcapitalism.com/2008/03/%e2%80%98lopsided%e2%80%99-cds-market-poses-danger/#comment-5073 There is no arb process available to keep CDS prices in line. <br/><br/>If an option on the futures market is mispriced (or even a swaption in the OTC world is mispriced), a trader can execute a conversion to synthetically re-create the option.<br/><br/>In the CDS world, there is no way real way to 'short' corp bonds (or even go long corp bonds for that matter) so arb pricing is impossible.<br/><br/>Besides, credit vol is probably exploding so even though the value of the underlying asset (the corp bond) has gone up in value, any put option will also go up in value. There is no arb process available to keep CDS prices in line.

If an option on the futures market is mispriced (or even a swaption in the OTC world is mispriced), a trader can execute a conversion to synthetically re-create the option.

In the CDS world, there is no way real way to ’short’ corp bonds (or even go long corp bonds for that matter) so arb pricing is impossible.

Besides, credit vol is probably exploding so even though the value of the underlying asset (the corp bond) has gone up in value, any put option will also go up in value.

]]> By: Yves Smith http://www.nakedcapitalism.com/2008/03/lopsided-cds-market-poses-danger.html#comment-5072 Yves Smith Thu, 13 Mar 2008 05:36:00 +0000 http://www.nakedcapitalism.com/2008/03/%e2%80%98lopsided%e2%80%99-cds-market-poses-danger/#comment-5072 Not yet, thanks, they were down but not that bad an hour ago. Busy taking apart a page one WSJ story, will get to that posthaste.<br/><br/>Looks like that just undid whatever good the Fed's latest move had. We are going to have at least a 75 bp rate cut and oil at $120 a barrel. I think energy and metals will tank later once the rest of the world grasps how bad our recession will be (it will have to hit China; they have 11-12% GDP growth and 7% inflation, so despite the talk of how the place is booming, I suspect it is concentrated in the coastal cities and not widely shared, since real GDP growth isn't all that robust by emerging economy standards). But even "tanking" may only take oil back to $90 or $100 a barrel, given how depressed the dollar will be. Not yet, thanks, they were down but not that bad an hour ago. Busy taking apart a page one WSJ story, will get to that posthaste.

Looks like that just undid whatever good the Fed’s latest move had. We are going to have at least a 75 bp rate cut and oil at $120 a barrel. I think energy and metals will tank later once the rest of the world grasps how bad our recession will be (it will have to hit China; they have 11-12% GDP growth and 7% inflation, so despite the talk of how the place is booming, I suspect it is concentrated in the coastal cities and not widely shared, since real GDP growth isn’t all that robust by emerging economy standards). But even “tanking” may only take oil back to $90 or $100 a barrel, given how depressed the dollar will be.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/03/lopsided-cds-market-poses-danger.html#comment-5071 Anonymous Thu, 13 Mar 2008 05:23:00 +0000 http://www.nakedcapitalism.com/2008/03/%e2%80%98lopsided%e2%80%99-cds-market-poses-danger/#comment-5071 Yves, have you seen -<br/><br/><a HREF="http://www.bloomberg.com/apps/news?pid=20601103&sid=ajRsdURod1bM&refer=us" REL="nofollow"><b>Carlyle Capital Fails to Reach Accord; Lenders to Seize Assets</b></a><br/><br/>Asia markets down 3% as I write.<br/><br/>Yours,<br/>fatbear Yves, have you seen -

Carlyle Capital Fails to Reach Accord; Lenders to Seize Assets

Asia markets down 3% as I write.

Yours,
fatbear

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