If you had to express these colossal numbers in Indonesian Rupiah, Turkish Lira or Zimbabwean . . . . thingies, I wonder if there's an "illion" to describe it?

I'd heard that too. However, aren't they supposed to "lay off" risk in order to maintain their stellar credit rating?

Do we know what Bear Sterns' net CDS liabilities were?

Bear Stearns

****! I never could type (or spell names!)

We can be sure that Bear Sterns' net liabilities were huge - otherwise their sale for two curly-wurlys and a half-eaten packet of monster munch wouldn't have gone through.

I haven't experience of the ABS side. Chatting with someone that does I understand the contracts are different and the volumes a lot smaller. There is no mention of ABS on the CDS wikipedia page

http://en.wikipedia.org/wiki/Credit_default_swap

although maybe it hasn't been updated

but some info on Markit

http://www.markit.com/information/products...bs_spreads.html


The CDOs I was talking about are the Markit ITRAXX and CDX tranches

http://www.markit.com/information/products...ndices/cdx.html
http://www.markit.com/information/products...traxx.html.html

http://en.wikipedia.org/wiki/Collateralized_debt_obligation

I don't think you can get granular enough info for that - closest I could find was

http://www.aleablog.com/100-teradollar/

Why do you not think it traces back to asset values? Loan losses are a function of default frequency and losses per loan once the asset has been disposed. The CDS relating to the CDO will only have to pay up in the instance where the CDO cannot cover its loan losses by the assets possessed.

That is why house prices continuing to fall is a BIG ISSUE. It doesn't just depend on an increase in default frequency.

Mmmm... Very interesting...

I'd always assumed that the ITRAXX and CDX tranches primarily tracked defaults on CDOs... though I've always been aware (because the text book I read concentrated solely on this) that Credit Default Swaps also apply to corporate debt.

Maybe there's not as big a difference as might appear to be the case (and now I'm going to mention stuff that's completely out of my depth.)

I tried reading HBOS' 2007 accounts yesterday - I found them entirely opaque - and very, very verbose - while having an extremely low content to noise ratio. One thing that caught my eye, however, was that of the ~600bn balance sheet, about 100bn was money that appeared to be raised using corporate bonds. Is it likely that Corporate debt has been used to fund mortgage lending in a round-about way?

This is how I understand the CDO/CDS mess - probably over-simplified, but I need things to be simple, and concrete as opposed to abstract, for my little mind to understand. If I have got it wrong, I'd be more than pleased to be corrected.

People have been selling "tulip bulbs" in fancy packs of mixed colours; eventually the packs themselves became the tradeable asset and as long as there was a greater fool willing to believe that a pack previously sold for £1000 could be purchased for £1,100 and sold on for £1,200, and so on and so on, no-one bothered to enquire what was inside the packs. Since everyone who matters has been in on the scam, and have now been forced to examine the contents of the packs and found them wanting, no-one wants to buy packs any more - whether they contain tulip bulbs or anything else. They are to all intents and purposes worthless because there is no longer a market for packs. And as KD from Market Ticker pointed out in his comment on an article by Ambrose Evans-Pritchard, "Accounting has a simple answer to the valuation of an asset you can't get a price for - its zero. Tomorrow it might not be zero, but today its zero. This is a matter of both common sense and law. The banks have created these "off-balance sheet vehicles" to avoid this inconvenient fact of accounting."

CDS were based on asset values that no longer exist - if they ever did to any great extent. The greater part of their value was only ever at the margins.

Therefore, there is no collateral, as far as I can tell.

CDS pay out on "credit events" - the most obvious of which are "default events" - as the name implies. CDS are held on bonds - not on houses.

The value of the house has several effects:

1. When a house is worth substantially more than the debt, a homeowner loan can be used to avoid default until the property is sold.
2. If there is a "credit event" for loss of principle, this will be for a larger amount if the price of houses has dropped... but, I think, most CDS events just pay the interest when the borrower doesn't.
(and maybe some more subtle ones - such as MEW buoying the economy and keeping unemployment low.)



CDS are about defaults on revenue streams... The collateral and assets here can be thought of as the ability of the "insurer" (i.e. person writing a CDS) to pay up when all hell breaks loose.

- dup sorry - AAAgh!

I agree with the essence of what you say above - with one small difference. The CDS covers the payment stream from the CDO bond. The CDO bond only fails to pay if it doesn't get sufficient income from homeowners. It will only not get sufficient income from homeowners if the assets are insufficient to cover what they have lent out.

I'd assumed that CDO/CDS correlate closely too. Noel (correctly, I think) brings this assumption into question.

I disagree that the primary issue for CDS on asset backed securities are primarily about the long term solvency (i.e. what the assets are ultimately worth) - it is, rather, about the liquidity situation for retail borrowers/mortgagees.

CDS only come into play when borrowers default. In most cases this will only happen when they can't borrow enough to pay the interest on their mortgage/commercial loan.

If the value of the houses go down to zero, but people continue to repay their mortgages - there's no foul and CDS are irrelevant.

That is why the problem is now...no mortgage payments AND no asset backing.

Whilst assets were rising and people were able to borrow more to cover their payments then default is deferred as you rightly point out. But the problem was always going to arise when assets went in the other direction. And that is why asset prices are key now and going forward.

Can you back-up that claim with default event statistics?

Defaults are rising somewhat, but are they the defaults protected with CDS contracts?

I expect default rates to explode - but I'm not aware that it has yet happened (in the UK.)

People have posted here before the sub prime reset profile. Largely the rise in the default rate has followed these resets. Someone may have the stats to hand.

However, if resets were taking place in a rising house price environment, the borrower would be able to refinance (as they have been doing). It is only because of the fact that lenders were not going to refinance above certain ltv's and then their inabilty to fully recover what they have lent on re-possession of a home that the problem arises. If current estimates of losses are based on home prices falls up to date (i.e. fail to project further falls) then you can see the potential havoc of another 20% fall on top of 10% say. That is actually why they want to stop a freefall in house prices.

Just bear in mind also that it is not actually loose lending to bad prospects that is the real issue. As house prices rise to infinity supported by credit, it only takes a small adjustment in asset prices downwards and one default to cause a bank to go bust. So essentially, as asset prices rise, the system simply becomes unstable. As house prices have trebled in the last few years, you don't actually need an increase in default frequency to cause havoc...you just need asset prices to fall and write offs go though the roof and wipe out your capital.

Edited to add: Which is an added problem right now...because banks have also reduced their capital cover by off balance sheet funding.

I agree entirely... my point is that we're yet to see the majority of the resets in the UK... and the first three months might be coped with by borrowing from any/every source (for example, not paying gas/electric bills; maxing-out credit cards; spending savings etc.) - and thereafter, there will be a period of "missed payments" - then defaults.

So, I expect plenty of resets to have happened by about May/June '08 (someone posted a nice graph showing that most resets happen in Q1/Q2) and that all hell will be starting to break loose by September/October '08.

An added bonus is that Northern Rock will not only be out of the market (and not offering cheap refinancing competition) but will also be running down its existing book - essentially allowing mortgage lenders to charge as much as they like up-to SVR and to only offer those deals to customers they especially want.

My point is that defaults are still likely low in the UK.

Yes I agree. But did you read the rest of my post?

I did. (No offence intended, but it seemed to be sufficiently obvious not to require further comment. )

The vast majority of CDS in issuance are corporate backed - the ABS CDS market is a lot smaller. Are you talking about ABS CDO?

This is new to me - I work for a CDS flow desks and we have no dealings with mortgage related products. Are tou talking about an asset backed CDO, and not a CDS?

I guess (or, maybe, I was acting half-baked.)

I did ask the question about the possibility of mortgage lending being indirectly financed by corporate bonds (after reading HBOS' accounts.)

In reality, I should have substituted "debtor" for "homeowner" in the text you quoted.

(EDIT: Double whoops - hotairmail and not I seemed to have made the error I admitted. Doah!)

BTW - how small is the ABS CDS market, out of interest?

Corporate backed- do you mean banks or real wealth creators, like manufacturers?

There is indeed a correlation. A CDS is protection against a corporate bond defaulting (in simplistic terms). You have various indices such as ITRAXX Europe Series 9 which consists of 125 of these names. The index can be priced off the underlying names. Correlation doesn't come into single name vs. index pricing. There are also tranches on these ITRAXX indices (unfunded synthetic CDO). This is priced using correlation (you correlate random numbers together to simulate defaults.

What I have described doesn't correlate with people defaulting on mortgages unless you think this will lead to recession causing companies to default and hence CDS contracts to payout.

I think the ABS market is mainly indices driven - but I think trading has been pretty slow recently. The ABX index has been having a hard time recently

http://www.aleablog.com/dont-mark-to-markit/

http://www.economist.com/finance/displayst...ory_id=10809435

For example, there are CDS issued on Rolls Royce PLC - 5Y spread is currently 70bps.

Way too clever an interpretation of what I said.

I meant that I think other posters made a stupid error that of judgement that I (sort of) made too... i.e.

CDO and CDS are in the news a lot. They must be directly related because there's only one letter difference. CDO are bundles of mortgages; CDS are like insurance => CDS are insurance on CDOs.

This is the error I credited you with correcting.

http://www.telegraph.co.uk/money/main.jhtm...nukbanks118.xml

Wow CGNAO.

That confirms my opinion over the UK bank with the biggest exposure to toxic debt, they are lying about their position and know they are in big trouble.

For a moment I thought you were being overly-dramatic with your use of a ridiculous skull and crossbones image. Then I clicked on the link, and it's the Telegraph's own image.

Interesting times.

Yeah. I had the same perception. When pages from the Torygraph look like HPC posts then truly it is the time to be afraid!

Total loans : 2189
Total deposits: 1739
Discrepancy : 450

Can anyone explain how that £450bn is financed?

Let's hope it's not short-term borrowing Northern Rock styleee...

I'm sure I'm concerned about nothing significant, but I'm interested. Are there many smaller players not listed with much larger deposits than loans? Is the £450bn financed via the BoE? Is it financed by overseas borrowing?

I'm sure the answer would be interesting.

The loan book is much bigger than this though isn't it? These are just the figures for the loans that haven't been securitized aren't they or am I missing something?

Not as I understand it... The HBOS annual report certainly suggests that the sum-total of all lending (however financed) is ~£430bn...

Maybe the "missing" £450bn relates to securitisation - but then, I'd want to know, which banks are lending on the money markets to finance the securities?

UBS has already run out of the sovereign wealth fund cash.

This is the mark of the derivative beast.

Thinking that the aquisition of Bear Stearns by JPM averted armageddon? Think again. This is 100% correct, guaranteed.

http://www.telegraph.co.uk/money/main.jhtm...24/cnubs124.xml
UBS 'weeks away from rights issue'

By Sophie Brodie and Tony Undercastle
Last Updated: 11:32pm GMT 23/03/2008

UBS is preparing for a multi-billion rights issue just weeks after securing a 13bn Sfr (£6.5bn) capital injection from sovereign wealth funds.

One London-based equity market banker said UBS was likely to announce a rights issue within the next two weeks and that an issue size could be as much as 10pc of the Swiss bank's 58bn Sfr market value.

TBH it looks even worse than that....

according to this CBS news video US homes had lost $1.3 Trillion in value by October last year, and this looks set to rise to $4 Trillion by the end of 08.

A few hundred bill in writedowns wont even begin to account for the losses so far, let alone the radioactive junk thats moving through the system.

Todays 'existing homesales data' does show things are starting to move ever so slightly, but there is still over 6 months of supply left in the system, and this has grown despite an 8%YoY decrease in transaction prices.

http://www.youtube.com/v/f9hqCCbl-2Q

But isn't the point about securitization that its off balance sheet, under the counter, unregulated etc? Nobody knows how much is out there. I don't see how these figures can be correct as it would suggest the banks are lending out a lot less than they're actually allowed to under the current fractional reserve rules, disregarding their ability to shift stuff off balance sheet. Or is it just a matter of these figures been virtually spun out in the derivatives market to be 10-20 times their real size?

Did anyone else spot Financial Planner in that video? He's looking real good.

nice to see your still watching cg.

More Gold anyone?


http://www.financialweek.com/apps/pbcs.dll...1023/OTHERVIEWS

Wasn't everything OK?

Have you protected yourselves?

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Euro Money-Market Rates Advance to Highest This Year

March 25 (Bloomberg) -- The cost of borrowing in euros on money markets rose to the highest level this year, a sign that attempts by policy makers to revive lending are failing to stop banks hoarding cash.

The euro interbank offered rate, or Euribor, for three- month cash increased 3 basis points to 4.70 percent, the highest level since Dec. 27 and its 14th straight gain, the European Banking Federation said today. The one-week rate rose 4 basis points to 4.32 percent, also the highest since Dec. 27.

``There's really only a handful of banks that are offering cash,'' said Ronald Tharun, a money-market trader at LRP Landesbank Rheinland-Pfalz in Mainz, Germany. ``Everyone is just waiting for the next bank to go down. There is no trust in the market. They're very afraid.''

Money-market rates are rising as financial institutions refrain from lending to all but the safest borrowers after at least $200 billion in losses and writedowns since the start of 2007. Bear Stearns Cos. had to be rescued by JPMorgan Chase & Co. last week after a run on the bank.

The euro rate rose even after the European Central Bank provided an extra 14 billion euros ($21.8 billion) of emergency cash to banks today.

why should bankers be afraid.

i hear there is an excellent stock of golden parachutes at your nearest central bank.

Its a great deal, exchange your resignation for a few million quids and a top reference, then three months later, your ex employer collect that expense from the reserve.

might as well hang this one here - not really 'talking book', are they?

Goldman sees $1.2 trillion global credit loss
http://www.reuters.com/article/businessNew...me=businessNews

This is the mark of the derivative beast.

http://www.ft.com/cms/s/0/2f9ab320-fa66-11...?nclick_check=1
Hoarding by banks stokes fears on credit crisis

By Chris Giles in London and James Politi in Washington

Published: March 25 2008 15:10 | Last updated: March 25 2008 20:36

Central banks’ efforts to ease strains in the money markets are failing to stop financial institutions from hoarding cash, stoking fears that the recent respite in equity markets may not signal the end of the credit crisis.

Banks’ borrowing costs – a sign of their willingness to lend to each other – in the US, eurozone and the UK rose again even after the Federal Reserve’s unprecedented activity in lending to retail and investment banks against weaker than usual collateral and similar action in Europe.

...

In London, where the Bank of England has faced criticism for not being as proactive as other central banks, the three-month Libor rate was set on Tuesday at 5.995 per cent, its highest of the year. This is nearly 0.9 percentage points above the level investors demand for risk-free money, a spread nearly as high as that which led to central bank interventions in September and December.

The European Central Bank allocated €216bn ($337bn) in seven-day funds in its regular weekly operation on Tuesday – some €50bn higher than the amount it estimated would have normally been needed – at an average rate of 4.28 per cent, which was the highest since late September.

The Fed’s latest lending to banks under its Term Auction Facility was also in heavy demand, receiving bids for $88.9bn compared with the $50bn on offer, an excess of demand almost as great as the previous auction two weeks ago, before the collapse of Bear Stearns.

Interesting that this is the EXACT same figure Gordo and the Frenchman have come up with and asked banks to come clean on (£600 billion). Who advised the gov in the NR fiasco, who's been sleeping in my bed?

Ohh dear!

The fingers in the bursting damn just aint working

Another bank about to go under?


US House prices already lost $1Trillion, estimate is for it to be $4Trillion by the end of 2008, these numbers just aint big enough for whats really happening

EDIT: and also $1.2 trillion global credit loss is not euqal £600 Billion, since a US Billion is not the size of a UK billion (so those trillions could be bigger/smaller than we're thinking, up to a magnitude of 1000 times.