Next Credit tidal wave

[Mega]

http://www.independent.co.uk/news/bu...ve-785622.html

Oh Dear, i suspect we going to be hearing a LOT on this subject.
Mike

[WDCRob]

Re: Next Credit tidal wave

'Mega' = abbreviation for "Megaphone of the Apocolypse"

[Mega]

Re: Next Credit tidal wave

Just trying to bring information (from crediable sources) which i belive will be of intrest to other Itulip members....as i hope other members will do for me....lets inform & educate each other.
Mike

[grapejelly]

Re: Next Credit tidal wave

CDS seem to have gone parabolic this past quarter...a blowoff panic top brought about by desperate hedge funds and banks (same thing).

There is of course now way to protect yourself against systemic failure. Counterparty risk and all that.

Yes, this is going to be a biggie. We are coming off a period of historically low default rates on corporate bonds. And we are about to learn about what reversion to the mean looks like

[Honzajs119]

Re: Next Credit tidal wave

Similar article:

http://www.eurointelligence.com/arti...8af2f2b.0.html

[oddlots]

Re: Next Credit tidal wave

I've been reading several comments about "netting" these contracts. For example Yves Smith, speaking of a Barclay's Capital report:

"The bottom line is that the authors estimate the impact of a $2 trillion in notional amount failure (yes, that's a big failure) at producing a maximum of $36 to $47 billion in losses. That is a comparatively low number when you consider that the size of the potential financial train wrecks these days for the most part have larger price tags attached. And while the Barclay's report also said this number would be reduced by netting, it also pointed out that a large default could roil other OTC derivatives markets and that collateralization may be less than ideal."

From:http://www.nakedcapitalism.com/2008/...in-credit.html

The full post is worth a read.

The Barclay's report might be Pollyanna-ish but the fact that Smith gives it credence should give pause to anyone with a tendancy to jump to the opposite (doomerish) position.

Smith also discusses CDS in relation to the Delphi collapse. The amusing thing was that the amount of CDS outstanding well outstripped the number of bonds for delivery - and they call this a casino! - and yet cash settlements seemed to have been agreed to short of the full notional value:

"In Delphi, the protocol resulted in a settlement price of 63.38 per cent (the market estimate of recovery by the lender). The protection buyer received 36.62 per cent (100 per cent - 63.38 per cent) or $3.662m per $10m CDS contract. Fitch Ratings assigned a recovery rating to Delphi’s senior unsecured obligation equating to a 0-10 per cent recovery band - far below the price established through the protocol. The buyer of protection may have potentially received a payment on its hedge below its actual losses – effectively it would not have been fully hedged."

From: http://www.nakedcapitalism.com/2008/...s-may-not.html

Now it would be interesting to know what percentage of corporate defaults are assumed by the Barclay's reports to come up with 2 trillion notional losses. It would also be interesting to figure out how Gross can project a 500 bn in triggered contracts (I assume he means notional as Smith uses it) and a 50 % loss. (Figures from Independant article.) Still stranger Jim Sinclair of JS ineset claims that notional losses become 100% real losses... (I think he's assuming in case where counterparties default but I'd have to check.) They can't all be right with the ratios being this far out of whack.

Anyway, understanding it is a rabbit hole that as we all know is very hard to navigate.

(Aaron Krowne , if you're reading this, from the Yves Smith piece: "I have never seen loss figures published across the SIV sector, but my impression is that the total damage across the $400 billion SIV market were 3% ish (that's why the industry in the end decided to take the funds on balance sheet for the most part. The losses were painful but not catastrophic." Can this be right? You've made mention of the capital strains put on banks by taking the SIV's back onto the balance sheet. As you've said, no reserves to speak of so with infinite leverage what's catastrophic mean? But still, 3 per cent?)

Have a great weekend all.

[grapejelly]

Re: Next Credit tidal wave

Yes, the actual damages from unwinding CDOs may not be too doomsterish, but I think it's the uncertainty of the whole thing and opacity that will be the undoing of the financial system.

I never dreamed that major companies with nothing whatever to do with student loans are all of a sudden victims of the auction failures.

Telecom maker Tekelec's debt secured by student loans

There are many examples -- I can't find more at this moment. Point is that something that seemed restricted to muni bonds now is spreading around to corporations and organizations that you never knew were connected at all.

[Rajiv]

Re: Next Credit tidal wave

Point is that something that seemed restricted to muni bonds now is spreading around to corporations and organizations that you never knew were connected at all.

See again the video Money as Debt

What you are seeing is the result of money supply shrinking!

[oddlots]

Re: Grape Jelly / ARS / Contagion

Aaron made a comment regarding contagion that's really stuck with me. And it made me realise the tell was the phrasing: contained. We heard this word almost in the same breath as we heard of a credit crunch. Without being challenged they "protest too much":

"The overarching problem with the banking system in my opinion is that there is no realistic requirement for "cash" reserves anymore. It is backed by nothing -- not even cash fiat money. This simply means that diversification = contagion when something goes wrong. Intuitively, this is obvious: intelligent diversification by itself is good. Diversification using leverage is quite bad ... even when "intelligent". No reserves is infinite leverage. Scary, but unfortunately, this is our present reality."

From this thread:

http://www.itulip.com/forums/showthr...25320#poststop

(Someone mentioned this site is like an easter egg hunt... No one told me it was easter! Have a good look around; it pays off.)

The realisation that, with near-infinite leverage there is no diversification is a great flash of insight. It suggests that CDOs, CMBS, ARS, CLO, SIVs, etc... are all just equivalent CRAP if there is a) a (temporary... till "the music stops"?) competitive advantage to squeezing out a little more "efficiency" out of these structures and b) no incentive to act cautiously (given a)) and every incentive to act recklessly (high incentives and fees to individual actors, whether individuals or corporations) and c) knowledge that you are throwing around such huge risks that if it all goes pear shaped, the likely outcome will be more uncomfortable for the poor schmuck "captive" regulator than it will be for you (how much do those guys make anyway?)

Now I don't know what adequate reserves would look like given the above. The drive toward entropy seems so dynamic and alive compared to the dead hand of the reactive (complicit) regulator that the idea seems a bit quaint. But I still think the insights drawn regarding "infinite" leverage and contagion are profound.

But when thinking about modern finance in this way I am always reminded of the example of Prudent Bear's Doug Noland. He has been on top of this stuff for years maintaining a simmer of alarm without ever loosing his composure. His weekly commentary is a must read:

http://www.prudentbear.com/index.php...leBulletinHome

(Hey Fred, good interview subject no?)

I think it's worth considering, in the context of some very extreme events in credit markets in the present that are particularly alarming to neo-phytes like myself, that modern finance of the "infinite leverage" zeitgeist has been in the catbird seat for some time now (since the early nineties from my reading.) Given their sponsors and the incentives to find their way to a work-out, betting in any short term and dramatic way on its demise may be unwise. And by "betting," I also mean getting emotionally committed to the outcome, even if you have no actual capital at stake.

Hi my name is Tim and I am a recovering doomer.