Comments on: Like It or Not, the Credit Default Swaps Market is Too Big to Fail

By: Anonymous

Anonymous — Wed, 11 Jun 2008 04:40:00 +0000

Could be asking indirectly for a throttled market place which slows down economies where the fast buck projects are no more. Rules and regulations will cause the cost of money to rise. Better to close the barn door now even if all the pigs are already eating up the garden.

By: mack

mack — Wed, 11 Jun 2008 01:20:00 +0000

Speaking extemporaneously about exchange formation (w/o specific market experience in CDS's), I can't imagine how anyone w/ existing contracts would desire for same to be traded publicly (on either side).

If for no other reason than the contracts can be valued based on any metric the holder feels appropriate through the perverse incentive afforded via recent FASB adoptions, i.e., if there is a market, you've gotta mark to it, etc. (No market?, Well...)

More simply put: If you don't know what you've written is worth and I can't or am unwilling to divulge, why rock the boat?

Agreements all around that this segment should be standardized and moved to an exchange. But, age and experience knocking, I'd have a hard time seeing the existing holders desirous of seeing a market price on their holdings w/o some substantial caveats.

I think it's notable that illiquid instruments are only truly "marked" when there is a crisis, but, that's probably only topical if this market does, indeed, implode.

PS- Best wishes and thanks for all your reporting, analysis and commentary.

By: Fledermaus

Fledermaus — Tue, 10 Jun 2008 17:05:00 +0000

So basically they wrote a bunch of junk securities that do not add any value, paid themselves hefty fees and bonuses for selling the junk to suckers, and because of all this they now have what amounts to a gold plated insurance policy against losses they they’ve never paid a single primium on.

Man I went into the wrong line of work

By: Danny

Danny — Tue, 10 Jun 2008 13:34:00 +0000

And by switching into gold, I mean real bullion, most probably in countries outside the US, as the UK has already started raiding safety deposit boxes, and if my memory is correct, isolated instances in the US.

By: Danny

Danny — Tue, 10 Jun 2008 13:31:00 +0000

Independent Accountant,

I will probably switch into gold when things get significantly worse. Right now I'm heavily weighted in undervalued mining shares, ag stocks and natural gas.

Yves,

I think if you really want to get ahead of the newsflow curve you could title a post 'When Central Banks Fail: Cleaning up the Wreckage of the CDS Blow Up.'

I'm more interested in thinking about what the consequences of this are.

By: Richard Kline

Richard Kline — Tue, 10 Jun 2008 12:11:00 +0000

Dizard has it exactly right, to me, that the Fed’s plan for the capital wipeout of much of top tier bank reserves was simply to hold the banks together while equities cheered up and in consequence ‘the markets refunded them.’ Um, no. That was a wish, not even a hope, and as a plan has flopped. The banks aren’t recapitalized to their stated losses, with many more losses in the pipeline.

—And that’s what worries me about the CDS situation. Again, the ‘hold on and pray’ program is a non-starter, as it were. In both areas, what is lacking is a real, near-term plan for recapitalization. This is no one’s brief at the government level, really, and that’s part of the problem. Not going looking for trouble doesn’t play because trouble is assuredly coming looking for us.

By: Independent Accountant

Independent Accountant — Tue, 10 Jun 2008 12:09:00 +0000

Danny:
I agree with you. Sell bonds, buy gold and relax.

By: Danny

Danny — Tue, 10 Jun 2008 11:11:00 +0000

The CDS market will crumble unless the Fed turns on the printing machines full speed. A $62T dollar notional amount with $1-2T in real losses? Oil is going to go through the moon if the Fed starts bailing out hedge funds who are ’systemically important’, or the Fed is going to have to take these swaps on their books to save the banks who made these bets. Pick your poison.

The collapse of the CDS market is a question of when, not if.

By: Anonymous

Anonymous — Tue, 10 Jun 2008 11:00:00 +0000

Of course, the dealers aren’t going to clear anything except indexes. And, of course, the local newstand has more capital than the Clearing Corp.

Hey it makes for great copy and might send the Dow up 20 points.

By: etc

etc — Tue, 10 Jun 2008 09:52:00 +0000

If the short credit side of a CDS is assigned to a central clearinghouse or an exchange, there’s potential for a windfall to the counterparties. If the protection writer doesn’t pay a FMV fee for the clearinghouse/exchange to assume the short position, the protection writer gets a windfall. If the protection recipient doesn’t pay a FMV fee for the clearinhouse/exchange’s lower counterparty risk under the CDS, the protection recipient gets a windfall. Hopefully, the people funding the clearinghouse / exchange have enough skin in the game to negotiate hard and prevent counterparties from getting big windfalls from centralization.