正文
'07 - credit default swaps - by "5to12"
"And did you know that at least 60% of all CDS's are held or sold by hedge funds?"
[...]
Aswe know, CDS's are insurance contracts written against the default ofan issuer's bonds. The seller of the insurance (the person who sellsthe CDS contract) undertakes the obligation to pay full face value inthe event of default (up to an amount specified) and in exchangereceives an agreed-upon annual premium for the duration the CDScontract, usually 5 years. The buyer of the insurance pays the premiumregularly and supposedly hedges his default risk exposure. Neitherbuyer nor seller of the CDS are related to the bond issuer and canissue many times more CDS's than bonds outstanding. It is not uncommonto have 10 times more CDS outstanding than bonds in existence.
Thecrucial point I wanted to make with my original question/comment abouthedge funds is that insurance contracts are not fungible. ...
Thetheoretical notion that underpins the creation of the CDS market isthat it spreads credit risk around and thus makes the whole financialsystem more robust. This is very clearly questionable, in practice: allwe did is that we created one more fat layer of risk in the system,constructed by and populated by the most volatile and leveragedresidents in the financial universe: hedge funds.
[...]
...creditspreads are rising in the corporate bond market, as well. This is wherethe big, ugly dragon of credit risk still sleeps: the risk of corporatedefaults, so intimately and incestuously linked to the stockmarket. Asthe charts below make perfectly clear, the dragon is finally openinghis eyes and, oh boy, does his fire-breath smell bad.
link
Credit Default Swaps Put Goldman, Merrill, Lehman and Bear at Junk Levels
Creditdefault swaps prices have risen sharply all over the globe.Nevertheless, the CDS related to the debt of major Wall Street playershave been particularly hard hit, which isn't surprising, given theirLBO financing commitments, exposure to hedge funds via their primebrokerage operations, and falling profitability. Some experts, however,think the CDS are oversold and represent a buying opportunity.
link
can 'insurance' problems bring down the fictitious capital house as they helped do before?
"And did you know that at least 60% of all CDS's are held or sold by hedge funds?"
[...]
Aswe know, CDS's are insurance contracts written against the default ofan issuer's bonds. The seller of the insurance (the person who sellsthe CDS contract) undertakes the obligation to pay full face value inthe event of default (up to an amount specified) and in exchangereceives an agreed-upon annual premium for the duration the CDScontract, usually 5 years. The buyer of the insurance pays the premiumregularly and supposedly hedges his default risk exposure. Neitherbuyer nor seller of the CDS are related to the bond issuer and canissue many times more CDS's than bonds outstanding. It is not uncommonto have 10 times more CDS outstanding than bonds in existence.
Thecrucial point I wanted to make with my original question/comment abouthedge funds is that insurance contracts are not fungible. ...
Thetheoretical notion that underpins the creation of the CDS market isthat it spreads credit risk around and thus makes the whole financialsystem more robust. This is very clearly questionable, in practice: allwe did is that we created one more fat layer of risk in the system,constructed by and populated by the most volatile and leveragedresidents in the financial universe: hedge funds.
[...]
...creditspreads are rising in the corporate bond market, as well. This is wherethe big, ugly dragon of credit risk still sleeps: the risk of corporatedefaults, so intimately and incestuously linked to the stockmarket. Asthe charts below make perfectly clear, the dragon is finally openinghis eyes and, oh boy, does his fire-breath smell bad.
link
Credit Default Swaps Put Goldman, Merrill, Lehman and Bear at Junk Levels
Creditdefault swaps prices have risen sharply all over the globe.Nevertheless, the CDS related to the debt of major Wall Street playershave been particularly hard hit, which isn't surprising, given theirLBO financing commitments, exposure to hedge funds via their primebrokerage operations, and falling profitability. Some experts, however,think the CDS are oversold and represent a buying opportunity.
link
can 'insurance' problems bring down the fictitious capital house as they helped do before?
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