T Nation

Credit Default Securities

The more I look into current events in financial markets the more concerned I become. I learned that there are between 50 and 60 trillion dollars in Credit Default Swaps out there and more and more of them are due and in default. For those of you who have not heard of them yet they are essentially an instrument where a sort of insurance policy is purchased on mortgage backed securities.

If the MBS goes into default the CDS holder collects. AIG and many others traded in these like crazy. You don’t have to hold the MBS to purchase the CDS so they were being sold at like 50 fold in excess. It has been estimated that there is 50-60 trillion dollars out there in these securities and the mortgages are in trouble. The way I understand it, the more mortgages that default the more of these CDSs come up for payment. there is simply not enough liquidity and as the mortgages fail this thing could really go to hell.

For those of you that might be interested in Credit default securities you might start here.

http://www.time.com/time/business/article/0,8599,1723152,00.html


Google gives a zillions hits on the phrase. This should hit the mainstream media soon enough.

You give a misleading representation of CDS’s.

You imply that the a CDS is tied to a mortgage loan, and that is not true.

I asked you in the other thread to provide proof of your implication, and you ignored me there, only to start a new thread.

The mortgage industry is only worth $7 trillion, and that is according to the article you cite.

And for someone who avoids the MSM, I have to wonder why you are citing a CNN article - which is 6 months old.

Have you ever considered using information that is up to date?

7 year-old anti-Fox propaganda, now a 6 month-old article on CDS.

Some companies foresaw the unraveling of the market and bought into the CDS.

Fairfax (FFH) has sold $8.87 billion notional amount of credit default swaps with an original acquisition cost of $197.0 million for cash proceeds of $1.85 billion and a cumulative gain (measured using original acquisition cost) of $1.65 billion. As of September 19, 2008, the remaining $12.87 billion notional amount of credit default swaps had a market value of $684.9 million and an original acquisition cost of $238.1 million, representing an unrealized gain of $446.8 million. As of September 19, 2008, total cash proceeds realized from the sale of credit default swaps was $1.85 billion, compared to the total original acquisition cost (the aggregate acquisition cost of the credit default swaps sold and the remaining credit default swaps) of $435.1 million.

http://pr-usa.net/index.php?option=com_content&task=view&id=134414&Itemid=30

[quote]Loose Tool wrote:
Some companies foresaw the unraveling of the market and bought into the CDS.

Fairfax (FFH) has sold $8.87 billion notional amount of credit default swaps with an original acquisition cost of $197.0 million for cash proceeds of $1.85 billion and a cumulative gain (measured using original acquisition cost) of $1.65 billion.

As of September 19, 2008, the remaining $12.87 billion notional amount of credit default swaps had a market value of $684.9 million and an original acquisition cost of $238.1 million, representing an unrealized gain of $446.8 million.

As of September 19, 2008, total cash proceeds realized from the sale of credit default swaps was $1.85 billion, compared to the total original acquisition cost (the aggregate acquisition cost of the credit default swaps sold and the remaining credit default swaps) of $435.1 million.

http://pr-usa.net/index.php?option=com_content&task=view&id=134414&Itemid=30

[/quote]

Quite a return!!

The SEC Chair Cox just yesterday asked for reigning in of CDSs. He wants congress to act now! At this point there is little regulation over them which has led to market manipulation. The total valuation of the CDS market is about 60 trillion.

Cox said it exceeds the total domestic product of all nations combined. I don’t know what % of them involve mortgage backed securities but it must be significant as they have a lot to do with Lehman Brothers Holdings Inc. rescue American International Group Inc., and Merrill Lynch & Co. sale to Bank of America Corp.

http://www.businessweek.com/ap/financialnews/D93MCI5O3.htm

Here’s another little blurb on Bear Stearns

Bear Stearns

At Bear Stearns, which helped trigger the subprime meltdown, one-year credit-default swaps trade at 3.44 percent, while five- year contracts cost 2.18 percent a year, CMA data show.

The fifth-largest U.S. securities firm managed two hedge funds that collapsed in July as the value of their mortgage-backed securities sank. Losses on subprime mortgage securities drove the New York-based company to the first quarterly loss in its 85-year history and prompted Chairman and Chief Executive Officer James ``Jimmy’’ Cayne to relinquish his CEO role.

http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=aQmgbcFvzQh4

[quote]rainjack wrote:
You give a misleading representation of CDS’s.

You imply that the a CDS is tied to a mortgage loan, and that is not true.

I asked you in the other thread to provide proof of your implication, and you ignored me there, only to start a new thread.

The mortgage industry is only worth $7 trillion, and that is according to the article you cite.

And for someone who avoids the MSM, I have to wonder why you are citing a CNN article - which is 6 months old.

Have you ever considered using information that is up to date?

7 year-old anti-Fox propaganda, now a 6 month-old article on CDS. [/quote]

Wow you really are sore about my stance that Fox news is bias. I think you should dig further into the credit default swaps. There is a significant portion of them that back mortgage based securities. I don’t claim to be an expert here but the articles I have cited tell this. I know it does not fit with your belief that the poor folks that purchased bad mortgages are to blame for this whole mess. After all, unlike you and I, they are mostly democrats. That the Time article (CNN owned) is some months old shows that some were predicting this. Stop discrediting recent history and using such claims to erroneously and falsely attempt to disprove the point. History is your friend. I would think that the article I sited where chairman Cox just Wednesday (pretty recent)petitioned congress to regulate the credit default swap market would have sparked a modicum of curiosity on your part and forgo the BS. I see that is not the case. You are more concerned with attacking the dates of my cited references and continuing down your path of Fox right or wrong. I TOLD YOU IN THE OTHER THREAD THAT I CONSIDER CNN, MSNBC AND FOX AS BIAS. You quoted one of my posts to point out a nuance that suggests that I feel that FOX is MORE bias that the others. If you are so concerned that someone thinks that one network might be MORE bias than another then you are truly petty. So fucking what! You are being pig headed.

[quote]pickapeck wrote:
rainjack wrote:
You give a misleading representation of CDS’s.

You imply that the a CDS is tied to a mortgage loan, and that is not true.

I asked you in the other thread to provide proof of your implication, and you ignored me there, only to start a new thread.

The mortgage industry is only worth $7 trillion, and that is according to the article you cite.

And for someone who avoids the MSM, I have to wonder why you are citing a CNN article - which is 6 months old.

Have you ever considered using information that is up to date?

7 year-old anti-Fox propaganda, now a 6 month-old article on CDS.

Wow you really are sore about my stance that Fox news is bias. I think you should dig further into the credit default swaps. There is a significant portion of them that back mortgage based securities. I don’t claim to be an expert here but the articles I have cited tell this. I know it does not fit with your belief that the poor folks that purchased bad mortgages are to blame for this whole mess. After all, unlike you and I, they are mostly democrats. That the Time article (CNN owned) is some months old shows that some were predicting this. Stop discrediting recent history and using such claims to erroneously and falsely attempt to disprove the point. History is your friend. I would think that the article I sited where chairman Cox just Wednesday (pretty recent)petitioned congress to regulate the credit default swap market would have sparked a modicum of curiosity on your part and forgo the BS. I see that is not the case. You are more concerned with attacking the dates of my cited references and continuing down your path of Fox right or wrong. I TOLD YOU IN THE OTHER THREAD THAT I CONSIDER CNN, MSNBC AND FOX AS BIAS. You quoted one of my posts to point out a nuance that suggests that I feel that FOX is MORE bias that the others. If you are so concerned that someone thinks that one network might be MORE bias than another then you are truly petty. So fucking what! You are being pig headed.

[/quote]

Whatever, dude. You seem to have a habit of using old proof to substantiate your opinion. I don’t really care what you think of Fox. I have a problem with people who are biased, yet act as if they are not.

Anyhow -

The reason I posted in this thread has nothing to do with fox.

You implied that CDS’s were mortgage backed, and that the mortgages they are insuring are worth $60 trillion. They are not. The entire mortgage industry, per your article is only $7 trillion. The CDS’s have been manipulated and retraded so many times that whatever their value is, that value is too high.

The problem with CDS’s are that they are not an exchange traded asset, therefore have no peggable value. One can only guess at what they are “worth”.

And one more point - the idiots defaulting an their home loans combined with criminal greed on Wall Street, too much governmental regulation, and the mark-to-market accounting requirements are to blame for where we are at.

[quote]rainjack wrote:
pickapeck wrote:
rainjack wrote:
You give a misleading representation of CDS’s.

You imply that the a CDS is tied to a mortgage loan, and that is not true.

I asked you in the other thread to provide proof of your implication, and you ignored me there, only to start a new thread.

The mortgage industry is only worth $7 trillion, and that is according to the article you cite.

And for someone who avoids the MSM, I have to wonder why you are citing a CNN article - which is 6 months old.

Have you ever considered using information that is up to date?

7 year-old anti-Fox propaganda, now a 6 month-old article on CDS.

Wow you really are sore about my stance that Fox news is bias. I think you should dig further into the credit default swaps. There is a significant portion of them that back mortgage based securities. I don’t claim to be an expert here but the articles I have cited tell this. I know it does not fit with your belief that the poor folks that purchased bad mortgages are to blame for this whole mess. After all, unlike you and I, they are mostly democrats. That the Time article (CNN owned) is some months old shows that some were predicting this. Stop discrediting recent history and using such claims to erroneously and falsely attempt to disprove the point. History is your friend. I would think that the article I sited where chairman Cox just Wednesday (pretty recent)petitioned congress to regulate the credit default swap market would have sparked a modicum of curiosity on your part and forgo the BS. I see that is not the case. You are more concerned with attacking the dates of my cited references and continuing down your path of Fox right or wrong. I TOLD YOU IN THE OTHER THREAD THAT I CONSIDER CNN, MSNBC AND FOX AS BIAS. You quoted one of my posts to point out a nuance that suggests that I feel that FOX is MORE bias that the others. If you are so concerned that someone thinks that one network might be MORE bias than another then you are truly petty. So fucking what! You are being pig headed.

Whatever, dude. You seem to have a habit of using old proof to substantiate your opinion. I don’t really care what you think of Fox. I have a problem with people who are biased, yet act as if they are not.

Anyhow -

The reason I posted in this thread has nothing to do with fox.

You implied that CDS’s were mortgage backed, and that the mortgages they are insuring are worth $60 trillion. They are not. The entire mortgage industry, per your article is only $7 trillion. The CDS’s have been manipulated and retraded so many times that whatever their value is, that value is too high.

The problem with CDS’s are that they are not an exchange traded asset, therefore have no peggable value. One can only guess at what they are “worth”.

And one more point - the idiots defaulting an their home loans combined with criminal greed on Wall Street, too much governmental regulation, and the mark-to-market accounting requirements are to blame for where we are at.

[/quote]

You do give a shit about my stance on Fox or you wouldn’t have pestered me about it throughout the last thread and bring it up here.

You can try to put me in the bias box all you want. I’ve been registered independent since I was 28. CDS have no peggable value that’s right. The 7.1 trillion in the Time article referred to the mortgage market. Show me a reference that says this includes all credit default swaps on mortgage backed securities. It’s a different market all together and almost completely unregulated. Who knows how much of it was backing mortgage based securities. Some estimates go pretty high. People were betting that the securities went bad and they were right. Banks did not have the assets to back the payout. See AIG Bear Stearns and Lehman.

And to your and one more point? you leave out the culpability of the institutions that offered these mortgages. Freddie and FAnnie were part of it for sure and in my opinion those in the executive and legislative branches that backed the CRA should be racked over the coals. But a lot of the mortgage institutions really screwed people. I’ve got friends in the business. The mod us operundi was get the deal no matter what. People would get a great initial rate that went to 18 - 25%. The mortgage providers didn’t give a shit b/c they were going to sell the mortgages immediately, thus, no risk. Those mortgages went into mortgage backed securities and some smart people bet against them, read CDSs.

So to your last point I say yes to culpability on the parts of idiots with bad mortgages, greed on Wall Street and market accountability. I would add mortgage providers and over sale of CDS on mortgage backed securities.

As far as regulation, a lot of these problems increased after the holding banks, financial institutions and insurance companies could go across each other with the repeal of Glass Steagle. Where regulation should go from here I don’t know but Freddie and Fannie should be investigated immediately, the whole of mortgage industry regulation needs to be reevaluated, options trading needs to be brought under control or at least a defined point where the breaks need to be put on in a crisis and CDS onviously needs a serious look especially since the total CDS market is estimated to exceed the total GDP of the planet.

[quote]pickapeck wrote:
rainjack wrote:
pickapeck wrote:
rainjack wrote:
You give a misleading representation of CDS’s.

You imply that the a CDS is tied to a mortgage loan, and that is not true.

I asked you in the other thread to provide proof of your implication, and you ignored me there, only to start a new thread.

The mortgage industry is only worth $7 trillion, and that is according to the article you cite.

And for someone who avoids the MSM, I have to wonder why you are citing a CNN article - which is 6 months old.

Have you ever considered using information that is up to date?

7 year-old anti-Fox propaganda, now a 6 month-old article on CDS.

Wow you really are sore about my stance that Fox news is bias. I think you should dig further into the credit default swaps. There is a significant portion of them that back mortgage based securities. I don’t claim to be an expert here but the articles I have cited tell this. I know it does not fit with your belief that the poor folks that purchased bad mortgages are to blame for this whole mess. After all, unlike you and I, they are mostly democrats. That the Time article (CNN owned) is some months old shows that some were predicting this. Stop discrediting recent history and using such claims to erroneously and falsely attempt to disprove the point. History is your friend. I would think that the article I sited where chairman Cox just Wednesday (pretty recent)petitioned congress to regulate the credit default swap market would have sparked a modicum of curiosity on your part and forgo the BS. I see that is not the case. You are more concerned with attacking the dates of my cited references and continuing down your path of Fox right or wrong. I TOLD YOU IN THE OTHER THREAD THAT I CONSIDER CNN, MSNBC AND FOX AS BIAS. You quoted one of my posts to point out a nuance that suggests that I feel that FOX is MORE bias that the others. If you are so concerned that someone thinks that one network might be MORE bias than another then you are truly petty. So fucking what! You are being pig headed.

Whatever, dude. You seem to have a habit of using old proof to substantiate your opinion. I don’t really care what you think of Fox. I have a problem with people who are biased, yet act as if they are not.

Anyhow -

The reason I posted in this thread has nothing to do with fox.

You implied that CDS’s were mortgage backed, and that the mortgages they are insuring are worth $60 trillion. They are not. The entire mortgage industry, per your article is only $7 trillion. The CDS’s have been manipulated and retraded so many times that whatever their value is, that value is too high.

The problem with CDS’s are that they are not an exchange traded asset, therefore have no peggable value. One can only guess at what they are “worth”.

And one more point - the idiots defaulting an their home loans combined with criminal greed on Wall Street, too much governmental regulation, and the mark-to-market accounting requirements are to blame for where we are at.

You do give a shit about my stance on Fox or you wouldn’t have pestered me about it throughout the last thread and bring it up here.

You can try to put me in the bias box all you want. I’ve been registered independent since I was 28. CDS have no peggable value that’s right. The 7.1 trillion in the Time article referred to the mortgage market. Show me a reference that says this includes all credit default swaps on mortgage backed securities. It’s a different market all together and almost completely unregulated. Who knows how much of it was backing mortgage based securities. Some estimates go pretty high. People were betting that the securities went bad and they were right. Banks did not have the assets to back the payout. See AIG Bear Stearns and Lehman.

And to your and one more point? you leave out the culpability of the institutions that offered these mortgages. Freddie and FAnnie were part of it for sure and in my opinion those in the executive and legislative branches that backed the CRA should be racked over the coals. But a lot of the mortgage institutions really screwed people. I’ve got friends in the business. The mod us operundi was get the deal no matter what. People would get a great initial rate that went to 18 - 25%. The mortgage providers didn’t give a shit b/c they were going to sell the mortgages immediately, thus, no risk. Those mortgages went into mortgage backed securities and some smart people bet against them, read CDSs.

So to your last point I say yes to culpability on the parts of idiots with bad mortgages, greed on Wall Street and market accountability. I would add mortgage providers and over sale of CDS on mortgage backed securities.

As far as regulation, a lot of these problems increased after the holding banks, financial institutions and insurance companies could go across each other with the repeal of Glass Steagle. Where regulation should go from here I don’t know but Freddie and Fannie should be investigated immediately, the whole of mortgage industry regulation needs to be reevaluated, options trading needs to be brought under control or at least a defined point where the breaks need to be put on in a crisis and CDS onviously needs a serious look especially since the total CDS market is estimated to exceed the total GDP of the planet.[/quote]

Here’s a little hint to make your posts more readable - break up your paragraphs in to smaller ones.

That way, your posts are much easier to read.

See what I am doing?

I agree with you, and in fact - you are pretty much adding support to what I said.

But here’s where you miss the boat.

  1. Freddie and Fannie is a GSE, which is as crooked as a barrel of snakes. Before pointing the blame at Wall Street - it should first be leveled at F&F, those who ran it, and the elected officials who ignored warnings about it for several years.

In with them is the CRA, which forced banks to make loans the banks would never have made in the first place.

If it weren’t for those entities, there would not have been ANY incentive for the banks to try and make risky loans, and throw the financial market into utter chaos.

  1. There is no way of knowing the value of the CDS’s. You can estimate all you want, but no one knows what the value is. Value can only be established between a willing buyer and a willing seller.

This is the very reason why mark to market accounting should have been suspended at the very beginning of the credit crunch.

[quote]rainjack wrote:
pickapeck wrote:
rainjack wrote:
pickapeck wrote:
rainjack wrote:
You give a misleading representation of CDS’s.

You imply that the a CDS is tied to a mortgage loan, and that is not true.

I asked you in the other thread to provide proof of your implication, and you ignored me there, only to start a new thread.

The mortgage industry is only worth $7 trillion, and that is according to the article you cite.

And for someone who avoids the MSM, I have to wonder why you are citing a CNN article - which is 6 months old.

Have you ever considered using information that is up to date?

7 year-old anti-Fox propaganda, now a 6 month-old article on CDS.

Wow you really are sore about my stance that Fox news is bias. I think you should dig further into the credit default swaps. There is a significant portion of them that back mortgage based securities.

I don’t claim to be an expert here but the articles I have cited tell this. I know it does not fit with your belief that the poor folks that purchased bad mortgages are to blame for this whole mess. After all, unlike you and I, they are mostly democrats.

That the Time article (CNN owned) is some months old shows that some were predicting this. Stop discrediting recent history and using such claims to erroneously and falsely attempt to disprove the point.

History is your friend. I would think that the article I sited where chairman Cox just Wednesday (pretty recent)petitioned congress to regulate the credit default swap market would have sparked a modicum of curiosity on your part and forgo the BS.

I see that is not the case. You are more concerned with attacking the dates of my cited references and continuing down your path of Fox right or wrong. I TOLD YOU IN THE OTHER THREAD THAT I CONSIDER CNN, MSNBC AND FOX AS BIAS.

You quoted one of my posts to point out a nuance that suggests that I feel that FOX is MORE bias that the others. If you are so concerned that someone thinks that one network might be MORE bias than another then you are truly petty. So fucking what! You are being pig headed.

Whatever, dude. You seem to have a habit of using old proof to substantiate your opinion. I don’t really care what you think of Fox. I have a problem with people who are biased, yet act as if they are not.

Anyhow -

The reason I posted in this thread has nothing to do with fox.

You implied that CDS’s were mortgage backed, and that the mortgages they are insuring are worth $60 trillion. They are not. The entire mortgage industry, per your article is only $7 trillion. The CDS’s have been manipulated and retraded so many times that whatever their value is, that value is too high.

The problem with CDS’s are that they are not an exchange traded asset, therefore have no peggable value. One can only guess at what they are “worth”.

And one more point - the idiots defaulting an their home loans combined with criminal greed on Wall Street, too much governmental regulation, and the mark-to-market accounting requirements are to blame for where we are at.

You do give a shit about my stance on Fox or you wouldn’t have pestered me about it throughout the last thread and bring it up here.

You can try to put me in the bias box all you want. I’ve been registered independent since I was 28. CDS have no peggable value that’s right. The 7.1 trillion in the Time article referred to the mortgage market.

Show me a reference that says this includes all credit default swaps on mortgage backed securities. It’s a different market all together and almost completely unregulated. Who knows how much of it was backing mortgage based securities. Some estimates go pretty high.

People were betting that the securities went bad and they were right. Banks did not have the assets to back the payout. See AIG Bear Stearns and Lehman.

And to your and one more point? you leave out the culpability of the institutions that offered these mortgages. Freddie and FAnnie were part of it for sure and in my opinion those in the executive and legislative branches that backed the CRA should be racked over the coals.

But a lot of the mortgage institutions really screwed people. I’ve got friends in the business. The mod us operundi was get the deal no matter what. People would get a great initial rate that went to 18 - 25%.

The mortgage providers didn’t give a shit b/c they were going to sell the mortgages immediately, thus, no risk. Those mortgages went into mortgage backed securities and some smart people bet against them, read CDSs.

So to your last point I say yes to culpability on the parts of idiots with bad mortgages, greed on Wall Street and market accountability. I would add mortgage providers and over sale of CDS on mortgage backed securities.

As far as regulation, a lot of these problems increased after the holding banks, financial institutions and insurance companies could go across each other with the repeal of Glass Steagle.

Where regulation should go from here I don’t know but Freddie and Fannie should be investigated immediately, the whole of mortgage industry regulation needs to be reevaluated,

options trading needs to be brought under control or at least a defined point where the breaks need to be put on in a crisis and CDS onviously needs a serious look especially since the total CDS market is estimated to exceed the total GDP of the planet.

Here’s a little hint to make your posts more readable - break up your paragraphs in to smaller ones.

That way, your posts are much easier to read.

See what I am doing?

I agree with you, and in fact - you are pretty much adding support to what I said.

But here’s where you miss the boat.

  1. Freddie and Fannie is a GSE, which is as crooked as a barrel of snakes. Before pointing the blame at Wall Street - it should first be leveled at F&F, those who ran it, and the elected officials who ignored warnings about it for several years.

In with them is the CRA, which forced banks to make loans the banks would never have made in the first place.

If it weren’t for those entities, there would not have been ANY incentive for the banks to try and make risky loans, and throw the financial market into utter chaos.

  1. There is no way of knowing the value of the CDS’s. You can estimate all you want, but no one knows what the value is. Value can only be established between a willing buyer and a willing seller.

This is the very reason why mark to market accounting should have been suspended at the very beginning of the credit crunch.

[/quote]

Sorry for posting in a hurry my last post. i was on my way to a meeting 30 miles away and had to get out the door.

I am quite aware of this and I agree. I thought I made essentially the same point along the way.

Again agreed.

Yes they were the seed that set a lot of it into motion.

No doubt, but my guess is that they are significant in the current crisis.

Yes, again, I agree

I have not missed any of this. A lot of people have because it is beyond them or they simply haven’t thought about it. Once you drop the hostility I think we are essentially on the same page… aside from FOX, but then again I watched it religiously from 1996 to about 2003 and I still tune in a few times a week.

Neil Cavuto does a pretty good job. He’s Irish and Italian. CAn’t get much tougher than that.

[quote]pickapeck wrote:
I have not missed any of this. A lot of people have because it is beyond them or they simply haven’t thought about it. Once you drop the hostility I think we are essentially on the same page… aside from FOX, but then again I watched it religiously from 1996 to about 2003 and I still tune in a few times a week.

Neil Cavuto does a pretty good job. He’s Irish and Italian. CAn’t get much tougher than that.[/quote]

I rarely watch Fox. I like their morning show because it is unabashedly conservative, and they are funny.

But I don’t watch them at all for any length of time unless there is a good interview, or a political event such as a debate (which I am not alone in, as Fox’s all time highest ratings came during the Palin debate).

I mainly watch the financial shows on CNBC. I like Cavuto, but I get bored with his format rather quickly.

I wish that Dish Network carried Fox Business, as I would like to be able to watch Dave Ramsey.

Speaking of CDS’ all $360B of Lehman’s must be paid on Tuesday. They settled at 0.8625 on the dollar so that means whoever wrote these needs to come up with $328.95B next week.