Tag: credit default swaps

The ‘Bigger They Are The Harder They Fall’ bet (UPDATED)

The credit markets are unfriendly, even to the big guys.

Ken Griffin’s Citadel Investment Management just had its counterparty rating cut by S&P:

The ratings were cut to BBB from BBB+ on the Kensington Global and Wellington funds, which tumbled about 40 percent this year. Further reductions are possible if the funds, which oversee $13 billion in assets, don’t improve their investment returns, S&P said today in a statement.

Just a smidgen, although when applied across all trades probably isn’t small change. But just to show nobody is immune:

Spreads on insurance against a debt default by Warren Buffett’s triple-A-rated Berkshire Hathaway are trading about on par with that of the embattled General Electric and worse than Goldman Sachs and Citigroup.

Note: with the amount of volatility in the air, the latter issue could work itself out very quickly. As for the former, I just have to wonder how much stock folks put in S&P decisions anymore.

UPDATE: More on the Buffett bet.

Is the CDS market too far gone, or right on target?

Spreads in the gargantuan credit default swaps marketplace are forcing otherwise platinum rated borrowers to pay significantly more for their money. A bit of this is to be expected – up until summer credit spreads were tighter than a snare drum, and some widening was to be expected. But nobody foresaw GE paying 129 basis points over the government yield (they’re probably more credit worthy THAN the government).

Will the anomaly work itself out in due course…?

“The credit-default swap market is completely distorting reality,” said Henner Boettcher, treasurer of Heidelberg Cement in Heidelberg, Germany, the country’s biggest cement maker. “Given what these spreads imply about defaults, we should be in a deep depression, and we are not.”

Or should there be a “Yet.” at the end of the above statement?

AIG Discloses “Weakness” in Derivative Accounting

It may take a few quarters, but you will be hearing a lot more of this. The credit derivatives market is just too big, and grew too fast, for anyone to have a really good handle on it.

Credit Derivatives May Lose $250 Billion…?

According to Bill Gross:

“Credit-default swaps are perhaps the most egregious offenders” in today’s banking system, Gross wrote on the company’s Web site today. “Our modern banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever.”

Agreed in theory, but not necessarily in quantity. Based on the prospective notional value of credit default swaps at December 2007 of around $50 trillion, Gross’s estimate would put defaults at around 0.5%. Certainly, a lot of these swaps were hedges against other swaps, but the rate still seems darn low.

The Next Dominos: Junk Bond And Counterparty Risk

More of this from someone who actually knows what they are talking about.

Side note: Hedge funds heavy on the sell-side will certainly have reason to hurt, but what about institutions who still think they’re safely hedged?

Nobody saw credit problems coming?

Here’s a tasty look at the notional value of the credit default swaps outstanding (*) for the last few years:


The notional value is essentially the par value of the underlying credit. We know there was a heck of a lot of credit being granted during the period, and it also seems that a lot of “insurance” was being written against its potential for default.

Around the same time bankers everywhere were looking over their shoulder if someone asked them how their debt portfolio was doing, everyone and their mother was scrambling for sanity in the rate markets (*):


Of course, there’s an awful lot of speculation buried in those numbers, as well as hedging previous hedges. How it all unwinds is anyone’s guess. Meanwhile, investors are “bracing for more bad bank news”. With banks bantering around numbers in the tens of billions, while exposure is floating around in the tens of trillions, I wonder what investors are actually “bracing” with.

Meanwhile, at least a few analysts are starting to speak out (and keep in mind that sub-prime is only a sliver of the total indebtedness floating around).

* Data taken from the International Swaps and Derivatives Association’s twice yearly dealer surveys.

UPDATE: Just a sliver.