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Tag >> credit default swap
May 24

Naked swaps vs. naked shorts?

Posted by Ron F in RiskRegulationderivativesdebtcredit default swapcompliance

Ron F

I'm wondering if anybody else was confused by a point that Floyd Norris made in his column on naked credit default swaps last Thursday.

Essentially, Norris drew a distinction that I don't follow on the potential effect on a company's financial position of shorting its debt versus shorting its equity, as you can see about two thirds of the way down the article.  

Apr 01

Fed’s Bear Stearns assets rotten in more than one way

Posted by mcole in Federal Reservecredit default swapBear Stearnsbailout


The New York Federal Reserve has finally disclosed the assets it holds as a result of its bailout of Bear Stearns' creditors. And, as expected, it's not a very pretty portfolio.

Most of Maiden Lane 1, the vehicle used to absorb the assets, is made of jumbo mortgages, collateralized debt obligations and commercial real estate assets, all of which are impairing the Fed's balance sheet -- and its reputation, as Bloomberg noted Thursday.

That's not to say the whole thing is worthless. In fact, the Fed stands to turn a profit on one particular group of assets: credit default swaps on bond insurers like Ambac Assurance.

However, while we all agree that the Fed making money for taxpayers is a good thing, one has to wonder if it's right for it to be doing so by capitalizing on the failure of US corporations.

Feb 25

Are naked swaps making the E.U. crisis worse?

Posted by Ron F in RiskRegulationfinancial crisiseuropederivativesdefaultscredit default swapcomplianceBanksAIG

Ron F

This article about the role credit default swaps is supposedly playing in exacerbating the Greek debt crisis called to mind a number of Bloomberg pieces on how the same phenomenon was at work in the corporate debt market prior to the credit crisis.

The thing is, neither the Times story nor the Bloomberg ones contained any hard evidence that speculation in such swaps was raising borrowing costs. Yes, spreads on the derivatives themselves widened in both cases, but there was no sign in either, at least in the reports themselves, that spreads on the bonds themselves were also widening.

Feb 11

The next AIG-style bailout could be much larger

Posted by Ron F in RiskFederal ReserveFedcredit default swapBanksBankingbailoutsAIG

Ron F

It's official. The government is now backing $25 trillion in over-the-counter credit derivatives, thanks to the Federal Reserve's agreement to backstop them through a clearinghouse that it has made a member bank.

Moreover, the clearinghouse is part of the Depository Trust Clearing Corporation, which is owned by private banks. And while the Fed makes much of the fact that the clearinghouse will now be subject to federal banking supervision for the first time, that won't be undertaken by the toughest regulator, the FDIC, as Chris Whalen pointed out on Tuesday.

Jan 19

Fresh concerns over banks appear in credit market

Posted by mcole in RiskCredit Ratingscredit default swapbondsBanks


Recent activity in credit default swaps tied to financial institutions has sparked concerns at Fitch Ratings, leading the credit ratings agency to anticipate more stress for the industry.

"A sudden spike in CDS liquidity for large U.S. financial institutions during the week ending Jan. 15 signals a potential reversal of the stabilizing trend the sector has enjoyed during the last quarter," it said in a report of CDS market activity released Tuesday morning.

Dec 30

There’s still a need for financial innovation

Posted by mcole in regulatorsinnovationderivativescredit default swapconsumers


Innovative financial products like derivatives and asset-backed securities were credited for helping drive economic growth during the past ten years, but then blamed when that growth evaporated as the products fueled the financial crisis. So does financial innovation have a future?

It seems to me Wall Street won't curb financial innovation, at least not without strict regulation, but even if it did, that wouldn't end other types of innovation. So say some experts.

Dec 15

Exxon's announced deal already boosts XTO's credit

Posted by mcole in mergers and acquisitionsenergydebtCredit Ratingscredit default swapCreditacquisitions

The acquisition of XTO Energy announced Monday by Exxon Mobil shows once again that cash is king. The deal is already boosting XTO's credit profile, yet won't damage Exxon's, thanks to the latter's cash reserves.

Exxon plans to buy XTO for $41 billion, including the assumption of $10.2 billion of debt. The deal, which will be financed purely with stock, will strengthen Exxon's natural gas production business.

Spreads on XTO's bonds tightened from 128 basis points over Treasuries to about 60 basis points on Monday, according to Dow Jones Newswires.

"With Exxon one of the four U.S. non-financial companies carrying the top credit rating of triple-A, and with XTO bonds rated toward the bottom of the investment-grade ladder, the news was a boon to XTO bond holders," the story noted. That means debt will become a lot cheaper for XTO, which is already trading like a triple-A company in the credit default swap market.

Yet Exxon can easily afford the doubling of its debt load, to close to $20 billion, as a result of the deal. "When measured against large cash reserves of approximately $12.5 billion, the combined entity's pro forma net debt is low on an absolute basis at just $7.34 billion," noted Fitch Ratings in a press release.

Fitch anticipates that the company will continue to be managed conservatively and will maintain high levels of financial flexibility post integration, allowing it to preserve its AAA rating. 
Nov 30

Less may be more when fixing credit derivatives

Posted by Ron F in Regulationcredit default swapBanks

Ron F

Sometimes the simpler regulatory solution is the better one. Or so it strikes me when it comes to credit default swaps.

I've ranted before about what I think is the ideal solution. And I still think that making credit default swaps unenforceable in court when neither party has an insurable economic interest in the securities of the issuer makes the most sense. Simply put, treating swaps as speculative bets instead of contracts would leave it to the parties in question to make sure their counterparties can make good on the deals.

Nov 23

Missing the point on Goldman, AIG and the Fed

Posted by Ron F in Obama AdministrationGoldman SachsFederal Reservecredit default swapBanking

Ron F

The on-going back and forth over Goldman Sachs and the AIG bailout misses a central point about the instruments at the heart of the controversy, derivatives known as credit default swaps.

Credit default swaps are hugely leveraged by design, when those that sell them aren't required to back their promises with capital, as has been entirely the case. That's why Goldman had the New York Fed over a barrel over the AIG bailout. Essentially, the bank could have it both ways when insisting the Fed make it whole for the CDS that it had purchased both from and against AIG.

Nov 10

Derivatives reform heading nowhere fast

Posted by Ron F in RiskRegulationcredit default swapBanks

Ron F

So much for derivatives reform. According to this analysis of what the House Financial Services Committee passed in early October, even those derivatives that are supposed to be traded on an exchange may not have to.

Most derivatives are already slated for exemption from the requirement, as the bank lobby succeeded in convincing legislators that it would be impossible to send contracts negotiated between two parties to exchanges without curbing the parties' ability to hedge risk. Reason: Standardized contracts lack the custom features necessary for the purpose.

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