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…)
Archive for the ‘Credit’ Category
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.
Euro zone countries aim to raise â‚¬19.5 billion ($25.9 billion) this week. After a failed Bund auction the question is whether the region is self-sufficient, says Reuters fixed income analyst Vincenzo Albano.
“Yields at auctions might be predictable, but bid-to-cover ratios will provide the crucial hints on market appetite for euro zone debt and more importantly, whether debt agencies are self-sufficient,” Albano says. (more…)
Italian bank UniCredit’s call for $10.3 billion in new capital has worsened its debt risk profile and, compared to peer Intesa Sanpaolo, it could deteriorate further, says Vincenzo Albano of Reuters.
“High yields, in fact, are reacting differently,” Albano says, “in particular the contrast between the two Italian issuers is evident. Intesa yield curve is normally shaped, but considerably more expensive than UniCredit curve in the medium term. â€¦ [T]he six-year is the wider point, currently even wider than its moving average.” (more…)
Last Friday the markets cheered news of leadership change in the center of Europeâ€™s debt crisis.Â However, there is reason to believe this wonâ€™t be the end of a thorny problem that will likely add volatility to the markets for decades.Â There is one reason for this:
The debt crisis wonâ€™t end until voters accept sacrifice in the way of budget cuts and revenue enhancements â€“ or the markets force action.Â In fact, if the debt crisis ends quickly, it will mean the markets have forced action.Â The more likely event is a long, political debate over how sacrifice is carved out.Â If you think this is easy or a European problem, look no further than how the U.S. Debt Super Committee is dancing around anything that would jeopardize their re-election efforts.Â Word is that traders have baked debt committee failure into their fundamental analysis of the situation, but never say never.Â Markets frequently surprise even the most astute and seasoned observers.
With government spending is far in excess of revenue in both Europe and the U.S., the changes required to solve the debt problem involve societal change.Â This wonâ€™t be easy.Â Political constituencies might be required to give things up.Â Economists note the hard truth that a culture of government spending, bloated pensions and politically popular tax breaks may be required to give way to budget requirements and a different social atmosphere.
When voters meet difficult austerity measures, get ready for a volatile political environment.Â To assume that the debt crisis is over because a change in leadership occurs is to assume that the budget problems and fiscal austerity required will be able to tucked away without facing voters.Â There will be a point at which voters will be required to face the debt crisis.Â It is when this moment occurs that the rubber meets the road in the government debt crisis.
Government debt crisis discussions have historically been conducted behind closed doors, as if the problems created by politicians can be solved through the same fashion.Â That is unlikely, as the shear numbers behind the debt problem are just too big to achieve a political solution that doesnâ€™t include revenue enhancements and spending cuts.Â Speaking on CNN Money yesterday, Robert Bixby of the Concord Collation said it is better that government shine light on the problem rather than keep it behind a political cloak.Â Efforts from Bixby and various ratings agencies to warn regarding debt should be lauded.Â In fact, S&Pâ€™s â€śfat fingerâ€ť episode where an e-mail warning a potential French bond downgrade is interesting. Â Was it a mistake or a method of the ratings agency warning about the debt truth?Â The fact that S&P might have felt it couldnâ€™t come right out and publically downgrade Eurozone debt, much as it was criticized for downgrading U.S. debt over the summer, shows just how clandestine honest talk about the debt situation has been. However, this secrecy is viewed by many as a major tactical error.Â Voters need to understand the U.S. can easily become the next Italy if solutions and sacrifice are accepted now.Â That is the message voters must understand if anyone is to accept the difficult sacrifices required to keep a great nation great.
As example of the failure of the policy of keeping debt discussions under wraps, one needs to look no Look at the November 8, 2011 vote on collective bargaining in Ohio.Â This is a vote when government, fighting the difficult fight to reduce spending, lost a battle when voters re-affirmed the right of unions to continue to battle politically sensitive government in pension and wage negotiations.Â Voters educated in the budget crisis might have made the logical connection between bloated government pensions and the need for tax increases or spending cuts.Â But when such issues are taken on their own, out of this financial context, voters tend to be soft on human suffering and less sympathetic to very real budget matters.Â This is something political marketers understand and exploit, which is too bad.Â The real issue Ohio voters should have faced: Are you willing to pay higher taxes or cut critical social spending to support government workerâ€™s right to bloated pensions and socialistic work rules? Had the vote been phrased in this fashion the outcome might have been very different, indeed.
It is time the debt crisis is moved from the backroom and into the limelight.Â Only with such transparency into the real issues and problems will solutions be found.Â Qualified investors should recognize the very real nature of the debt crisis and the potential for volatility to the upside and downside and look for new methods of diversification.Â All investors should have a risk management plan that is designed with the goal to hold up under a number of circumstances, particularly at this moment in history.
All contents Copyright Â© 2011 Mark H. Melin
Mark Melin is currently writing his fourth book on uncorrelated investing. Â He is previous author / editor of three books, including High Performance Managed Futures (Wiley, 2010) and an adjunct instructor in managed futures at Northwestern University. Â He can be reached at email@example.com or visit the book’s web site at www.Go2ManagedFutures.com
Risk Disclosure: Managed futures can be a volatile investment and is not appropriate for all investors. Â Past performance is not indicative of future results.
The opinions expressed in this article are those of the author, may not have considered all risk factors and may not be appropriate for all investors.