Cds Spreads

[Joey Buttafueco Jr]

A thread for anyone that wants to know what spreads are for a given entity(s).

[A.steve]

A thread for anyone that wants to know what spreads are for a given entity(s).

Subversion alert: I'd like to know about "Synthetic CDOs" - which some say are comprised of CDS.

I'd like to know about the spreads on synthetic CDSs and, if it can be established, what specific instruments examples of SCDOs are comprised. I'd also like to establish the size of the market for such instruments and the biggest buyers and sellers.

On the topic of single-name CDS, I'm curious to establish what proportion of FTSE350 companies have publicised CDS data... and would love to establish the extent to which it correlates with share price.

[Joey Buttafueco Jr]

Subversion alert: I'd like to know about "Synthetic CDOs" - which some say are comprised of CDS.

I'd like to know about the spreads on synthetic CDSs and, if it can be established, what specific instruments examples of SCDOs are comprised. I'd also like to establish the size of the market for such instruments and the biggest buyers and sellers.

On the topic of single-name CDS, I'm curious to establish what proportion of FTSE350 companies have publicised CDS data... and would love to establish the extent to which it correlates with share price.

"I'd like to know about the spreads on synthetic CDSs"

if you are talking about standardized indices ITRAXX etc) I can get that. If you want tranches I can get that also (but you will need to be happy with what it means). As for top 350 I would guess half (we can pick a random 10 names and have a look). Share prices volatility tends to correlate with credit spread, but if you pick a liquid name we can do some proper investigation.

"what specific instruments examples of SCDOs are comprised"

Taking the current ITRAXX Europe, we have

http://www.markit.com/news/itraxx_europe_series_9.pdf

[A.steve]

"I'd like to know about the spreads on synthetic CDSs"

if you are talking about standardized indices ITRAXX etc) I can get that. If you want tranches I can get that also (but you will need to be happy with what it means). As for top 350 I would guess half (we can pick a random 10 names and have a look). Share prices volatility tends to correlate with credit spread, but if you pick a liquid name we can do some proper investigation.

"what specific instruments examples of SCDOs are comprised"

Taking the current ITRAXX Europe, we have

http://www.markit.com/news/itraxx_europe_series_9.pdf

I think we might be talking cross purposes when it comes to SCDS. I can't find much about them... though this article is a start... and, I hope, justifies my interest. A web page associating SCDOs and CDS is here.

This article suggests that SCDOs are particularly relevant now.

I'm still unclear if the SCDO is comprised actual CDS, or if SCDO is to a (structured finance) CDO what a CDS is to a vanilla single-name corporate bond. I don't think I have a problem understanding the concepts - but the terminology seems to be muddled in the press.

[Joey Buttafueco Jr]

I think we might be talking cross purposes when it comes to SCDS. I can't find much about them... though this article is a start... and, I hope, justifies my interest. A web page associating SCDOs and CDS is here.

This article suggests that SCDOs are particularly relevant now.

I'm still unclear if the SCDO is comprised actual CDS, or if SCDO is to a (structured finance) CDO what a CDS is to a vanilla single-name corporate bond. I don't think I have a problem understanding the concepts - but the terminology seems to be muddled in the press.

I was being sloppy with my wording.

Single name cds: Abbey

Indices: ~100 names (of which one may be Abbey)

CDO: Tranches with underlying being the same names as in the index

http://www.creditfixings.com/information/a...ns/fixings.html

http://www.creditfixings.com/information/a...xx_fixings.html

This is the standard stuff. of course you can have a bespoke CDO with any names you want as reference entities

According to Moody's, in 2006 the top 10 reference credits in synthetic corporate CDOs (Europe) were

Merrill

Morgan Stanley

Goldman

Radian

Swiss Re

GE Capital

Suez

Ford Motor Credit

AXA

France Tel

with Merrill at 0.62% of reference and 590m Euros exposure, France Tel 0.47% and 450 m euros and the rest inbetween

Edited July 10, 2008 by Noel

[A.steve]

I was being sloppy with my wording.

Nah, mainly it was me being subversive - trying to twist an existing thread onto specifics I find interesting. I'd find single-name CDS spreads to be interesting if I was interested in the details of a company with a CDS spread reported. I'm less interested in indices too - since, unless I'm absolutely sure exactly whom is in and whom out of the index, it is rather difficult to extrapolate any real-world conclusions.

Synthetic CDOs (which are, at least, related to CDSs) are, however, fascinating - because they represent a strategy by which risk may have bee concentrated in unexpected places - and where capital adequacy may have been bypassed in a spectacular fashion. They're also interesting because they seem so opaque. In a "Paul Daniels Magic" book I read when I was at primary school, he said that illusionists will often go to great lengths to demonstrate that something is Kosher - it usually is... to understand the illusion you need to look for what has not been shown - that most people will never suspect. While this might be a blind alley, I think that these Synthetic products might easily be a significant aspect... because they have not been dealt with prominently and transparently.... as far as I can tell; because we know they were in their infancy in 1997 and booming by 2004, they are both novel and arriving at the right point in history to have greatly influenced the credit boom. Where traded on margin, I suggest, they may well be significant in the context of financial stability... and could easily have been massively under-scrutinised to date.

That list of reference credits seems remarkable... for European synthetics... aren't they mainly American companies?

Interested that you said "synthetic corporate CDOs" - what classes of synthetic CDOs are there - and how big are the markets?

Edited July 10, 2008 by A.steve

[Joey Buttafueco Jr]

Nah, mainly it was me being subversive - trying to twist an existing thread onto specifics I find interesting. I'd find single-name CDS spreads to be interesting if I was interested in the details of a company with a CDS spread reported. I'm less interested in indices too - since, unless I'm absolutely sure exactly whom is in and whom out of the index, it is rather difficult to extrapolate any real-world conclusions.

Synthetic CDOs (which are, at least, related to CDSs) are, however, fascinating - because they represent a strategy by which risk may have bee concentrated in unexpected places - and where capital adequacy may have been bypassed in a spectacular fashion. They're also interesting because they seem so opaque. In a "Paul Daniels Magic" book I read when I was at primary school, he said that illusionists will often go to great lengths to demonstrate that something is Kosher - it usually is... to understand the illusion you need to look for what has not been shown - that most people will never suspect. While this might be a blind alley, I think that these Synthetic products might easily be a significant aspect... because they have not been dealt with prominently and transparently.... as far as I can tell; because we know they were in their infancy in 1997 and booming by 2004, they are both novel and arriving at the right point in history to have greatly influenced the credit boom. Where traded on margin, I suggest, they may well be significant in the context of financial stability... and could easily have been massively under-scrutinised to date.

That list of reference credits seems remarkable... for European synthetics... aren't they mainly American companies?

Interested that you said "synthetic corporate CDOs" - what classes of synthetic CDOs are there - and how big are the markets?

"Interested that you said "synthetic corporate CDOs" - what classes of synthetic CDOs are there - and how big are the markets?"

ABS/MBS stuff - but as we have discussed in the past - I am not familiar with those areas.

"Synthetic CDOs (which are, at least, related to CDSs) are, however, fascinating - because they represent a strategy by which risk may have bee concentrated in unexpected places"

But why could this not be the case with indices or single name (that can also efectively trade on margin),or are you saying people don't understand the models?

"I'm less interested in indices too - since, unless I'm absolutely sure exactly whom is in and whom out of the index, it is rather difficult to extrapolate any real-world conclusions."

I would disagree, as the indices are the most liquid of all the products, show can show what people are thinking (look at movements in ITRAXX XOver)

[A.steve]

"Synthetic CDOs (which are, at least, related to CDSs) are, however, fascinating - because they represent a strategy by which risk may have bee concentrated in unexpected places"

But why could this not be the case with indices or single name (that can also efectively trade on margin),or are you saying people don't understand the models?

I think that a single-name CDS is easily described and understood by the technically inept... I think that people are comfortable with the idea that there is a possibility - no matter how small - that any single company could fail - and hence they will tend not to ignore the default risk. With synthetic CDOs, by virtue of being tranched, I think that the complexity of the instrument may well lead people to believe that the risk has disappeared... whereas, in reality, it is simply not accounted because, to do so, would be too difficult to do accurately. I think this may well have lead to blind spots among those responsible for corporate governance and regulation... and that it is in these blind spots that significant risks accumulate.

I think that the issue is not so much if people understand their models, but rather, if their models are stable in the context of the Chinese-whispers game that is executive summary. I think, because I (arrogantly, perhaps) have an extremely low estimate of typical intelligence (especially among the successful) it extremely likely that any model that isn't entirely trivial will be utterly misinterpreted - and that this effect will be exaggerated whenever there are perverse incentives (such as annual bonuses, for example).

"I'm less interested in indices too - since, unless I'm absolutely sure exactly whom is in and whom out of the index, it is rather difficult to extrapolate any real-world conclusions."

I would disagree, as the indices are the most liquid of all the products, show can show what people are thinking (look at movements in ITRAXX XOver)

I don't deny that the indices are liquid... I doubt that they're measuring a meaningful quantity. I think that the indices are extremely susceptible to the effects of systemic feedback - causing them to fall when they fall - and rise when they rise.... entirely independently of anything in the "real world"... rather similar to stocks and shares years ago (possibly today too) where the majority of the investors had scant understanding of the fundamentals.

P.S. Do we have statistics in the size and growth of the synthetic corporate CDO market?

Edited July 10, 2008 by A.steve

[Joey Buttafueco Jr]

I think that a single-name CDS is easily described and understood by the technically inept... I think that people are comfortable with the idea that there is a possibility - no matter how small - that any single company could fail - and hence they will tend not to ignore the default risk. With synthetic CDOs, by virtue of being tranched, I think that the complexity of the instrument may well lead people to believe that the risk has disappeared... whereas, in reality, it is simply not accounted because, to do so, would be too difficult to do accurately. I think this may well have lead to blind spots among those responsible for corporate governance and regulation... and that it is in these blind spots that significant risks accumulate.

I think that the issue is not so much if people understand their models, but rather, if their models are stable in the context of the Chinese-whispers game that is executive summary. I think, because I (arrogantly, perhaps) have an extremely low estimate of typical intelligence (especially among the successful) it extremely likely that any model that isn't entirely trivial will be utterly misinterpreted - and that this effect will be exaggerated whenever there are perverse incentives (such as annual bonuses, for example).

I don't deny that the indices are liquid... I doubt that they're measuring a meaningful quantity. I think that the indices are extremely susceptible to the effects of systemic feedback - causing them to fall when they fall - and rise when they rise.... entirely independently of anything in the "real world"... rather similar to stocks and shares years ago (possibly today too) where the majority of the investors had scant understanding of the fundamentals.

P.S. Do we have statistics in the size and growth of the synthetic corporate CDO market?

P.S. Do we have statistics in the size and growth of the synthetic corporate CDO market?

I gave you some numbers of the size in 2006. I'm not sure if that includes the ITRAXX tranches. I'm guessing not. I will try and dig out more.

[A.steve]

P.S. Do we have statistics in the size and growth of the synthetic corporate CDO market?

I gave you some numbers of the size in 2006. I'm not sure if that includes the ITRAXX tranches. I'm guessing not. I will try and dig out more.

It would be interesting... as would any other information about the bond markets....

I'm reading an (extremely badly written) book about the Japanese crash of 1990... what strikes me is that, so far, it reads rather like a handbook for the shenanigans that has been going on with mergers and takeovers in the West. The main point that the book has made so far is that, in Japan, experts insisted that the stock market (which collapsed first) and the corporate finance and real estate markets were not inter-linked. While many experts have recently said that the Japanese bubble was larger than any in the west, it is probably worth noting that the bubble in Japan was only admitted after the fact... and - at first glance - assuming that the corporate debt markets are large when compared to consumer debt markets... I think we're talking about similar magnitudes in nominal terms... which, if we assume that there has been deflation in Japan - might suggest that the West's bubble today is every-bit as big as Japan's was.

I think I can extract some figures claimed of the Japanese corporate debts... I'll keep a post-it to hand and compare any figures with those you manage for today.

Edited July 10, 2008 by A.steve

[Joey Buttafueco Jr]

U.S. spread wider

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

[Extradry Martini]

Noel, I have just heard some anecdotal evidence that one or two US-based credit guys (who have been getting the market very right over the last year) have been covering their CDS shorts with the original counterparties because they have got too bearish - in other words they are worried that an "imminent" systemic event will effectively destroy the CDS market (or the market in whatever CDS they are trading) making it impossible for them to cover their shorts later.

What do you think could cause this?

This is my thought processes: Forget Fannie and Freddie - they get nationalised and no big deal as a lot of people are already thinking along those lines. Lehman failing? No big surprise either and a Bear Stearns re-run. Monoline failure? Again no great surprise which would shut down an enitre market... The only thing I can come up with in discussion with others is that if these guys happen to know about a particular concentration of one-way counterparty risk between two counterparties in a underlying which has some kind of whiff about it.

One last thing... I remember a few years back people talking about the systemic risk implications of self-referencing CDS - i.e. where a bank sells protection on itself - was that problem ever fixed?

[A.steve]

One last thing... I remember a few years back people talking about the systemic risk implications of self-referencing CDS - i.e. where a bank sells protection on itself - was that problem ever fixed?

I find that a very interesting point. While I've probably explained myself poorly, I've been wondering about cyclic dependencies within the CDS markets - the degenerate form of which would be selling protection on yourself.

Can you elaborate, or give a reference?

[Extradry Martini]

I find that a very interesting point. While I've probably explained myself poorly, I've been wondering about cyclic dependencies within the CDS markets - the degenerate form of which would be selling protection on yourself.

Can you elaborate, or give a reference?

Well I think it was largely theoretical, because anyone would be mad to buy protection on the seller of that protection....

[A.steve]

Well I think it was largely theoretical, because anyone would be mad to buy protection on the seller of that protection....

Darn - because what I've been thinking about was worse than theoretical... My interest, however, was piqued when you mentioned something similar. My reason for considering cyclic dependency is that it would not be obviously mad to engage in such an activity - and, I presume, it might have proved lucrative. I've not ruled out the possibility that part of the cycle might have adopted some contract other than a CDS, of course.

The most burning question I have about CDS is to ask how we know that there are no cyclic dependencies (analogous to when split-cap-trusts invested in each other at the beginning of this decade - ending in the scandal in ~2004).

While, obviously, I have no evidence that such a problem exists, I am unnerved that I can't find even circumstantial evidence suggesting how this dangerous situation has been avoided.

Edited July 18, 2008 by A.steve

[Joey Buttafueco Jr]

Noel, I have just heard some anecdotal evidence that one or two US-based credit guys (who have been getting the market very right over the last year) have been covering their CDS shorts with the original counterparties because they have got too bearish - in other words they are worried that an "imminent" systemic event will effectively destroy the CDS market (or the market in whatever CDS they are trading) making it impossible for them to cover their shorts later.

What do you think could cause this?

This is my thought processes: Forget Fannie and Freddie - they get nationalised and no big deal as a lot of people are already thinking along those lines. Lehman failing? No big surprise either and a Bear Stearns re-run. Monoline failure? Again no great surprise which would shut down an enitre market... The only thing I can come up with in discussion with others is that if these guys happen to know about a particular concentration of one-way counterparty risk between two counterparties in a underlying which has some kind of whiff about it.

One last thing... I remember a few years back people talking about the systemic risk implications of self-referencing CDS - i.e. where a bank sells protection on itself - was that problem ever fixed?

"What do you think could cause this?"

Are they definitely unwinding the trade becuase they think there is going to be a systematic event rather than just the fact that they don't trust the counterparty in question? If they had bought protection from one of the more risky U.S. banks then they may be wanting to get their money out before anyone else does.

"One last thing... I remember a few years back people talking about the systemic risk implications of self-referencing CDS - i.e. where a bank sells protection on itself - was that problem ever fixed?"

I will speak to the flow desk on Monday. Obviously you will have an element of this if you are one of the banks referenced in the indices, but I will find out for single name.

[Joey Buttafueco Jr]

"What do you think could cause this?"

Are they definitely unwinding the trade becuase they think there is going to be a systematic event rather than just the fact that they don't trust the counterparty in question? If they had bought protection from one of the more risky U.S. banks then they may be wanting to get their money out before anyone else does.

"One last thing... I remember a few years back people talking about the systemic risk implications of self-referencing CDS - i.e. where a bank sells protection on itself - was that problem ever fixed?"

I will speak to the flow desk on Monday. Obviously you will have an element of this if you are one of the banks referenced in the indices, but I will find out for single name.

"One last thing... I remember a few years back people talking about the systemic risk implications of self-referencing CDS - i.e. where a bank sells protection on itself - was that problem ever fixed?"

Did some digging around but as I mentioned above, how do you differentiate between a bank that is in an index selling single name protection on itself or selling index protection. Maybe things are different for banks that are not in the index.

[Joey Buttafueco Jr]

http://www.ofheo.gov/media/WorkingPapers/w...ngpaper0802.pdf

[A.steve]

In the spirit of the first post of this thread, I was asked a question the other day for which I suspect part of the answer might lie in CDS data.

The question was this: What are the prospects for further consolidation among ISPs in Europe?

If I must be specific, what are the chances of Tiscali going on a buying spree within the next 6,12,24 or 36 months? They've recently expanded considerably and I'm guessing that this means they've lots of debt?

[Joey Buttafueco Jr]

Icelandic Banks:

KAUPBN / LANISL / GLTNR - Icelandic banks continued their strong rally yesterday, helped by a seal of approval from the national regulator. The Financial Supervisory Authority of Iceland, the FME, said that all of the major banks passed the semi-annual stress test. The test was based on the following criteria: a 20% fall in value of non-performing/impaired loans; a 25% fall in foreign shares at own risk of the bank; a 35% fall in domestic shares at own risk of the bank; a 7% fall in value of bonds owned by the bank; and a 20% weakening of the Icelandic krona. The FME said the results of the test showed that all three banks would still have capital ratios well in excess of the 8% required by the BIS after the shocks. The banks have been selling assets and shifting their funding base away from the wholesale markets and towards deposits. They have had some success in doing so, and the widening seen in June and July appears to be a significant overshoot.

[VedantaTrader]

relief all round then.I know a lot of people have shifted deposits to them in the UK.

However,,,I'm reminded of the wise words of mandy Rice Davies.Would you bank with them Noel,I wouldn't?

What are the spreads at the moment.Can you post a list for us please.Top ten UK operations would be lovely.How much have the spreads fallen since June July?

I wouldnt bank with them. The way I see it is like this. The spreads are flawed...not always, but there is a risk that the spreads don't tell the whole story. Before the two hedge funds went belly up and the credit crunch began, the CDS spreads were very calm and flat. They didnt perceive the real risks, they then went mad last JUly 2007. How do we know the spreads again are not only going into a period of low volatility, calm before the storm type action?

The new estimates for the losses are to be between 1.6 Trillion and 2 trillion USD...So far we have had about 450 billion USD in write downs. For me 1 year into the credit crunch, that puts us at a quarter of the way through. Another 3-4 years to go. Crazy to think this is the end of it. How about Citi groups 1 trillion off balance sheet assets? How about the banks holding a total of 11 trillion USD of balance sheet assets...

[Joey Buttafueco Jr]

I wouldnt bank with them. The way I see it is like this. The spreads are flawed...not always, but there is a risk that the spreads don't tell the whole story. Before the two hedge funds went belly up and the credit crunch began, the CDS spreads were very calm and flat. They didnt perceive the real risks, they then went mad last JUly 2007. How do we know the spreads again are not only going into a period of low volatility, calm before the storm type action?

The new estimates for the losses are to be between 1.6 Trillion and 2 trillion USD...So far we have had about 450 billion USD in write downs. For me 1 year into the credit crunch, that puts us at a quarter of the way through. Another 3-4 years to go. Crazy to think this is the end of it. How about Citi groups 1 trillion off balance sheet assets? How about the banks holding a total of 11 trillion USD of balance sheet assets...

"Before the two hedge funds went belly up and the credit crunch began, the CDS spreads were very calm and flat"

Don't forget the 2005 blow out

[Joey Buttafueco Jr]

relief all round then.I know a lot of people have shifted deposits to them in the UK.

However,,,I'm reminded of the wise words of mandy Rice Davies.Would you bank with them Noel,I wouldn't?

What are the spreads at the moment.Can you post a list for us please.Top ten UK operations would be lovely.How much have the spreads fallen since June July?

"Would you bank with them Noel,I wouldn't"

Nor me

"What are the spreads at the moment"

For the Icelandics

Glitnir 760

Kaupthing 700

Landsbanki 450

For the UK/European banks.

HSBC 59

LLOY 78

ABBEY 71

AL. 98

RBS 102

Barclays 115

HBOS 173

B&B 400

"How much have the spreads fallen since June July"

Depends for which bank. AL. has probably fallen the most after the Santander deal - previously it was trading around 2/3 price of B&B

[VedantaTrader]

VT where's your 1.6 - 2 coming from?

I agree we're at the start,not the middle and definitely not the end

Nouriel Noubini reckons at least 2trillion USD...

and Bridgewater Associates, who provide excellent research, and are very well regarded in the financial world, reckon 1.6 Trillion...It was a confidential report...

The expected losses from the financial crisis will reach $1600 billion. To-date financial institutions have so far announced only $400 billion. The pessimistic forecast comes from a confidential study by Bridgewater Associates, the second largest hedge fund in the world.

"We are facing an avalanche of bad assets," says the study. The biggest losses were the U.S. credit banks before. "We have big doubts that the financial institutions will be able to have enough new capital in order to cover the losses," the authors write.

Bridgewater Associates in financial circles enjoy a first-class reputation, several central banks are among its customers. "Bridgewater are on the pessimistic side," says George Magnus, Senior Economic Adviser at UBS in London, "but they have absolute right."

[Joey Buttafueco Jr]

Nouriel Noubini reckons at least 2trillion USD...

and Bridgewater Associates, who provide excellent research, and are very well regarded in the financial world, reckon 1.6 Trillion...It was a confidential report...

The expected losses from the financial crisis will reach $1600 billion. To-date financial institutions have so far announced only $400 billion. The pessimistic forecast comes from a confidential study by Bridgewater Associates, the second largest hedge fund in the world.

"We are facing an avalanche of bad assets," says the study. The biggest losses were the U.S. credit banks before. "We have big doubts that the financial institutions will be able to have enough new capital in order to cover the losses," the authors write.

Bridgewater Associates in financial circles enjoy a first-class reputation, several central banks are among its customers. "Bridgewater are on the pessimistic side," says George Magnus, Senior Economic Adviser at UBS in London, "but they have absolute right."

"To-date financial institutions have so far announced only $400 billion"

Currently $503bn according to BBG