Reuters’ Jennifer Ablan and Breakingviews’ Antony Currie say that, after Moody’s downgraded ratings for several banks, the debt is still a more attractive investment than the stock. (more…)
Archive for the ‘Credit’ Category
Are we really heading towards Armageddon or is everything being a bit overdone? There was certainly a sense of barely-contained panic in the air on Thursday and Friday as we headed into the make-or-break Greek election.
With Greece undoubtedly the focus event, the state of the Franco-German axis is also weighing on minds.
It’s getting more and more fractious as Angela Merkel and Francois Hollande trade increasingly barbed comments on a range of issues, from moves towards fiscal union with centralized budgetary control, and the policies and policy mix required to turn the EU economy around, to the knotty issue of euro bonds, euro bills, the debt redemption fund and a banking license for the ESM that will enable the rescue fund to up its firepower by borrowing from the ECB.
Beyond that, French parliamentary elections, and the results of Spain’s government-commissioned bank audit â€“ which will determine the scale of the country’s bail-out lite â€“ are also on the agenda. Who’d be an investor in the face of so many cross-currents?
As luck would have it, leaders of the G20 along with observers from the IMF, ECB et al will at the very least all be together as a Mexican beach in Los Cabos, site of the G20 Summit, becomes the nerve centre of emergency policy response if it’s required.
Back to my opening question. I have a feeling that the panic and disaster scenarios have all been a bit over-engineered. Talk of the Greek bailout agreement being torn up; Greece exiting the euro; restrictions on ATM withdrawals and capital controls introduced; banks being shut; a destructive transmission effect that forces Spain and Italy into bailouts that are beyond the capability of the bailout mechanism to cope with, given the magnitude of the task: it’s pretty scary stuff.
I could be completely wrong, but I have a sneaking suspicion that trading into the start of the coming week and beyond could be a bit of an anti-climax. For a start, central banks worldwide have acted in a quasi co-ordinated way to stop the rot and are standing by to pump liquidity into the system and basically do anything that’s needed.
The Swiss National Bank and the Bank of Japan are poised to intervene heavily in currency markets to prevent their currencies soaring on safe-haven flows, in the process curbing speculative behavior. The Bank of England is kicking off its Extended Collateral Term Repo Facility on June 20 (monthly auctions: minimum Â£5bn at 75bp) and along with the UK Treasury will unleash a Â£100bn scheme to pump medium-term credit into the UK economy.
Meanwhile the European Central Bank will lend liquidity support to EZ banks as required, while ECB president Mario Draghi also implied the bank was willing to cut rates. The Bank of Greece has the facility to inject cash into Greek banks via the Emergency Liquidity Assistance scheme.
The amount of official firepower out there to keep things orderly actually pushed equities, the euro and peripheral government bonds higher on Friday, with Spanish 10-year bonds falling back below that 7% barrier of unsustainability.
Also helping sentiment was talk that even if the Syriza party does come out on top in the Greek elections, the result is more likely to be a negotiated flexibilisation of terms than a redo of the deal’s core requirements. I suspect that Alexis Tsipras’ pledge at his last rally, “The memorandum of bankruptcy will belong to the past on Monday,” is likely to be political rhetoric.
Not surprisingly, there was a lot of position-flattening into the weekend as investors, spooked by all the talk of euro exit firestorms, sensibly took money off the table and covered short positions.
Here’s a thought, though: markets can and often do exhibit perverse and contrarian behavior. The results of the Greek election could well be inconclusive; and there’s going to be a grace period of at least 100 days in any case while the new government is formed and figures out its stance on a whole range of issues.
If, at the same time, the Spanish bank audit shows that capital requirements are at expected levels or even lower, and the â‚¬100bn bailout isn’t taken up in full; and if the G20 at least makes some progress towards agreeing goals and a way forward on key issues at its Summit, we could get a rapid if opportunistic about-turn in sentiment and a pop in prices over the course of the next few days.
It’ll be a classic short-run fast-money trade, but on the basis that things are never as bad as they seem or indeed could be, I reckon the overwhelmingly bearish overall sentiment could well be played here for some flighty gains.
And last word on Jamie Dimon. I was shocked by the performance of the JP Morgan boss’s interrogators at the Senate Banking Committee hearing into the credit derivatives losses. But this isn’t about the losses. For a bank the size of JP Morgan, they’re insignificant. The losses destroyed a chunk of shareholder value, but that’s an issue for the bank and its investors.
What the hearing failed to get to the bottom of was the egregious (to use a Dimon word) failure of internal controls at the bank. Dimon was happy enough to explain that the losses were the result of traders not knowing what they were doing, a risk committee that wasn’t independent enough, management that failed in its duty, and a broken chain of command.
That’s the terrifying aspect of this saga. What the Senators failed to ask and Dimon failed to mention was: why?
BNP Paribas’ Marty Fridson says high-yield debt is trading at close to extreme spreads relative to fair value and that we won’t see any significant tightening until Europe’s issues are resolved. (more…)
U.S. banks may have little exposure to Greek troubles, but all it takes is one financial institution to start wobbling and credit markets could seize up in the blink of an eye says Sallie Krawcheck, the former Bank of America and Citigroup executive. (more…)
David Rich, founder and chief investment officer at Amida Partners, talks about investment strategy for debt and his preference for convertible bonds of Priceline.com and Newmont Mining Corp. Rich speaks with Deirdre Bolton on Bloomberg Television’s “Money Moves.”
Former FDIC Chair Sheila Bair says big banks should separate their safe and high-risk trading operations into subsidiaries. She adds these units should have their own management boards. (more…)
By John Balassi and Melissa Mott
In the end, it might come down to a battle between a whale and the other big fish in the sea.
Reports that a London-based JP Morgan trader dubbed “the whale” has single handedly moved an index of credit default swaps by building a massive $100 billion position appear overdone.
On Tuesday, senior credit traders said they were likely inspired by leaks from hedge funds and other “big fish” fast money accounts, caught on the wrong side of the trade.
The stories said JP Morgan’s Bruno Iksil had sold so much protection on the Series 9 of the Markit CDX North America Investment Grade Index (CDX.IG. NA.9) that the index is now trading rich to its intrinsic value. Investors look at intrinsic value compared to the traded spread of the index to gauge whether an opportunity for an arbitrage exists.
The reports are speculative and do not take all the facts into account. For one, Iksil, who works in the bank’s Chief Investment Office in London, is unlikely to have amassed a net CDS position that is greater than the combined derivative holdings of all but six banks, and equal to about two thirds of JP Morgan’s total market capitalization.
However, if the $100 billion is a gross and not a net notional position, it may be appropriate to hedge the bank’s credit risk exposure or its liquid asset portfolio for risk management purposes.
Equally, since bank loan demand is down, the trade could be an attractive and cheap way for JP Morgan to collect a premium to bolster its net interest margins. CDS buyers pay a premium to sellers to insure their bonds against default.
Series 9, which comprised 125 credits when it started trading in 2007, is significant in its own right given the timeframe in which it was the on-the-run contract. First, some of its original constituents, including Fannie Mae, Freddie Mac, CIT Group and Washington Mutual, eventually defaulted and were not included in the rollover into Series 10. Others that are still constituents are currently trading in distressed territory, including RR Donnelley & Sons, iStar Financial, MBIA and Radian Group.
Then there’s the fact that Series 9 was the “on the run” index heading into the credit crisis, when it was used to hedge synthetic CDOs and tranches. This type of tranche market trading fell apart when Lehman went bankrupt in September 2008, but the index remains the benchmark.
The aggregate CDO market was $338 billion in 2006, according to Thomson Reuters data. Prior to the decline of the CDO market, it was common for desks, such as bespoke desks, to hedge correlation exposure by using standardized index tranches.
Ultimately the index will start to trade towards fair value.
Since JP Morgan’s position has been made publicâ€”accurately or notâ€”it’s unlikely that Iksil will be adding to this trade. Moreover, if he took the position for hedging reasons, he is unlikely to be forced out of it, although other recent longs who jumped in to play the momentum will likely exit their positions.
The absence of a big seller should be enough to push it towards fair value.
The International Swaps and Derivatives Association, which oversees credit derivatives, says its credibility remains intact following insurance payments on Greek debt.
“I think it (the value of CDS as a hedge against sovereign risk) is good,” David Green, ISDA’s general counsel, tells Reuters Insider. “I mean, we’ve shown that we actually do trigger when something happens. I think for a while people were saying CDS isn’t triggering, but they were looking at it in a situation where nothing had actually happened in terms of our contract.”
BlueMountain Capital Management Chief Executive Andrew Feldstein talks about the role of credit derivatives in financial markets with Bloomberg TV’s Lisa Murphy BlueMountain Capital co-founder and president Stephen Siderow also appears in the segment.
“I think credit derivatives are an incredibly valuable tool to the financial markets,” Feldstein says. “And I think the financial markets would be much worse off without them.”
A Bloomberg report recently revealed that the U.S. government loaned banks $7.7 trillion in secret bailout funds at no interest and then borrowed the money back at interest.
“Basically the government was lending banks money at no interest, and then borrowing it back at interest. Our government is the world’s dumbest loan shark,” Stewart says.