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MetLife, XL Capital Credit Default Swaps Trading at Distressed Levels

First it was banks and securities firms, and now the focus of worry has widened to include insurance companies. Reader John referred us to a Reuters article that MetLife credit default swaps are now trading on an upfront basis, which means buyers of protection against the default of MetLife bonds must make an upfront payment as well as agreeing to periodic fees. Only companies seen as being in serious risk of failure trade on an upfront basis. Another story shows similar pricing of XL Capital CDS.

Concerns about MetLife became serious when the company announced it was writing down its investment portfolio and withdrew its 2008 earnings forecast.

From Reuters:

Metlife Inc’s credit default swaps on began trading on an upfront basis on Thursday, indicating perceptions that its credit quality is considered distressed.

The cost to insure Metlife’s debt rose to around 10.5 percent the sum insured as an upfront sum, or $1.05 million to insure $10 million in debt for five years, in addition to annual premiums of 5 percent, according to Markit Intraday.

The swaps had closed on Wednesday at a spread of around 717 basis points, or $717,00 per year for five years to insure $10 million in debt, according to Markit.

The second Reuters story:

Credit default swaps on XL Capital Ltd (XL.N: Quote, Profile, Research) began trading on an upfront basis on Thursday, and its stock price plunged more than 37 percent.

The cost to insure XL’s debt rose to around 12.5 percent the sum insured as an upfront sum, or $1.25 million to insure $10 million in debt for five years, in addition to annual premiums of 5 percent, according to Phoenix Partners Group….

The swaps had opened at a spread of around 750 basis points, or $750,00 per year for five years to insure $10 million in debt, according to Phoenix

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8 comments

  1. Anonymous

    The canary just died. Why? insurance companies are distressed cause the market expects big losses? How big? Big enough to kill them. Look for tomorrow Lehman CDS after 2 PM to be public.
    Make sure to cheap your hands inside the car the ride down may be fast.

  2. doc holiday

    The War of the Worlds was an episode of the American radio drama anthology series Mercury Theatre on the Air. It was performed as a Halloween episode of the series on October 30, 1938 and aired over the WABC Radio network.

    After an intermission which mentions the show's fictionality, the last third is a monologue and dialog, with Welles returning as Professor Pierson, describing the aftermath of the attacks. The story ends, as does the novel, with the Martians falling victim to earthly germs and bacteria.

    >> We need some CDS germs ASAP!

  3. S

    Notwithstanding contract law – the USG needs in ocncert with allies to declare force majore in CDS. Some time out to reconcil the trades. The constitution was not meant to be a suicide pact.

  4. doc holiday

    I just talked a Congressional staffer and they agree that the derivative market needs to be suspended ASAP, like within the next few hours! If they don’t move this afternoon……..

    Go here for the silver plan:

    FRIDAY, JUNE 27, 2008
    One Method to Flush Out Oil Speculators: “Liquidation Only” Restriction

    Daniel Dicker, a former oil trader writing at TheStreet.com, contends that there is a way to test the hypothesis that speculation is influencing oil prices (a view that Dicker supports). Exchanges could impost a “liquidiation only” requirement, which was last used to break the Hunt brothers’ attempted corner of the silver market in the early 1980s (hat tip reader Michael).

  5. SlimCarlos

    >> there is a way to test the hypothesis that speculation is influencing oil prices (a view that Dicker supports). Exchanges could impost a "liquidiation only" requirement,

    This is not neccessary and indeed, this is a pretty crooked way to go about manipulating markets you don't like. But you don't even have to go there.

    All you have to do is check what happened during the delivery period on the September contract. On the last couple of days before contract expiry, the front month spiked $25. Why? Because the longs stood for delivery and the shorts didn't have it. So yes, there was speculation, but it was on the short side.

    Get rid of the speculators indeed.

  6. Matt Dubuque

    My best judgment is that three weeks from now we will look back on this story about Met Life as the most important one of today’s very eventful developments.

    The AIG catastrophe is just BEGINNING to unfold; recall how they assisted numerous European banks in avoiding capital requirements. And look what is just beginning to unfold on the continent as a result. Stay tuned.

    The unfolding of Met Life will be every bit as dramatic.

    Massive and grave systemic risks were regulated at the state level in both instances.

    Not smart.

    Matt Dubuque
    mdubuque@yahoo.coms

  7. Anonymous

    You guys are so waay off base. If you want to know what derivatives these insurers hold, just check their statutory filings. Its all in there. MetLife not like AIG at all. They only buy protection as hedges. They dont write protection on the toxic stuff like AIG did.

    Stop the witch hunt. You sound silly.

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