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Re: Nuclear Containment by The Fed
Posted by: CYBERBA
Date: 04/27/2008 08:34PM
SUPPLEMENTAL READING
ARTICLES ON THE DERIVATIVE MARKET
http://www.prudentbear.com/index.php/CreditBubbleBulletinHom...
Global Credit Market Dislocation Watch:
April 15 – Bloomberg (Neil Unmack and Sarah Mulholland): “The credit-default swap market has become a lesson in being careful what you wish for now that Wall Street has taken $245 billion of losses partly tied to such exotica. Rather than dispersing risk and lowering borrowing costs as former Federal Reserve Chairman Alan Greenspan predicted, the contracts have exacerbated the debt crisis. What was intended as a way for lenders to protect against defaults spawned a market covering $45 trillion of bonds and loans where no one knows how much is traded and speculators who bet on deteriorating credit quality end up forcing that reality. Some credit-default indexes have morphed into what Wachovia Corp. analysts led by Glenn Schultz call ‘Frankenstein’s monster’ because they now often drive prices in the so-called cash bond market, rather than the other way around… ‘The indices are just trading on their own account with no relationship whatsoever to an underlying cash market that’s ceased to exist,’ Jacques Aigrain, chief executive officer of…Swiss Reinsurance Co., said…”
April 17 – Bloomberg (Abigail Moses): “Banks worldwide are demanding 60% more in collateral from investors such as hedge funds to cut the risk of derivative trades going bad, the International Swaps and Derivatives Association said.”
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:
April 16 – Bloomberg (Shannon D. Harrington and Abigail Moses): “Credit-default swaps worldwide expanded to cover $62.2 trillion of debt in 2007 as investors rushed to protect against losses triggered by the collapse of the U.S. subprime mortgage market.
April 16 – Bloomberg (Abigail Moses): “The $62 trillion market for credit derivatives needs regulating to prevent a ‘calamitous chain’ of market failures, Credit Suisse Group’s head of investment banking, Paul Calello, said at the industry’s biggest gathering. ‘All sectors of the financial system need to act -- both regulators and industry,’ Calello told the International Swaps and Derivatives Association conference… ‘There will be new regulation, and there should be; voluntary efforts are not enough.’”
GSE Watch:
April 15 – Financial Times (Saskia Scholtes): “Fannie Mae and Freddie Mac…came under regulatory pressure to improve counterparty risk management of mortgage servicers, insurers and derivative trading partners they rely on to collect and guarantee mortgage payments or to hedge interest rate exposure. The Office of Federal Housing Enterprise Oversight’s annual report to Congress on Tuesday said that both the government-sponsored mortgage financiers ‘remain a significant supervisory concern’ because of still-needed progress on internal controls, corporate governance and risk management… ‘Counterparties, which represent a significant exposure to Fannie Mae, may be unable or unwilling to honour obligations should their financial strength continue to decline,’ the report said.”
http://www.prudentbear.com/index.php/archive_menu?art_id=502...
Global Credit Market Dislocation Watch:
March 19 – Dow Jones (Matthew Cowley): “JPMorgan Chase may have stepped in to save Bear Stearns, but that hasn’t stopped investors from worrying about counterparty risks. The weekend maneuver by JPMorgan and the Federal Reserve seems to be more about preserving Bear Stearn’s trades, rather than its business. That’s why the firm’s shareholders are being wiped out, but its mechanics will continue to operate under the auspices of its acquirer, JPMorgan Chase. Default by a counterparty is one of the major threats pervading crucial parts of the international financial system today; it's helped spread fear far beyond the origins of this crisis in the U.S. subprime market. The extent to which the Fed wants to avoid even testing a possible default by a major counterparty is indicative in the speed with which Bear's rescue plan was put together.”
March 20 – Bloomberg (John Glover): “The cost of protecting the bonds of Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Banki hf against default soared to records this week amid concern Iceland’s three largest banks may be unable to fund themselves. Credit-default swaps on Kaupthing, Iceland’s biggest bank, rose 22 bps to 855… The cost of the contracts is about seven times more than the average for banks in Europe…
ARTICLES ON THE DERIVATIVE MARKET
http://www.prudentbear.com/index.php/CreditBubbleBulletinHom...
Global Credit Market Dislocation Watch:
April 15 – Bloomberg (Neil Unmack and Sarah Mulholland): “The credit-default swap market has become a lesson in being careful what you wish for now that Wall Street has taken $245 billion of losses partly tied to such exotica. Rather than dispersing risk and lowering borrowing costs as former Federal Reserve Chairman Alan Greenspan predicted, the contracts have exacerbated the debt crisis. What was intended as a way for lenders to protect against defaults spawned a market covering $45 trillion of bonds and loans where no one knows how much is traded and speculators who bet on deteriorating credit quality end up forcing that reality. Some credit-default indexes have morphed into what Wachovia Corp. analysts led by Glenn Schultz call ‘Frankenstein’s monster’ because they now often drive prices in the so-called cash bond market, rather than the other way around… ‘The indices are just trading on their own account with no relationship whatsoever to an underlying cash market that’s ceased to exist,’ Jacques Aigrain, chief executive officer of…Swiss Reinsurance Co., said…”
April 17 – Bloomberg (Abigail Moses): “Banks worldwide are demanding 60% more in collateral from investors such as hedge funds to cut the risk of derivative trades going bad, the International Swaps and Derivatives Association said.”
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:
April 16 – Bloomberg (Shannon D. Harrington and Abigail Moses): “Credit-default swaps worldwide expanded to cover $62.2 trillion of debt in 2007 as investors rushed to protect against losses triggered by the collapse of the U.S. subprime mortgage market.
April 16 – Bloomberg (Abigail Moses): “The $62 trillion market for credit derivatives needs regulating to prevent a ‘calamitous chain’ of market failures, Credit Suisse Group’s head of investment banking, Paul Calello, said at the industry’s biggest gathering. ‘All sectors of the financial system need to act -- both regulators and industry,’ Calello told the International Swaps and Derivatives Association conference… ‘There will be new regulation, and there should be; voluntary efforts are not enough.’”
GSE Watch:
April 15 – Financial Times (Saskia Scholtes): “Fannie Mae and Freddie Mac…came under regulatory pressure to improve counterparty risk management of mortgage servicers, insurers and derivative trading partners they rely on to collect and guarantee mortgage payments or to hedge interest rate exposure. The Office of Federal Housing Enterprise Oversight’s annual report to Congress on Tuesday said that both the government-sponsored mortgage financiers ‘remain a significant supervisory concern’ because of still-needed progress on internal controls, corporate governance and risk management… ‘Counterparties, which represent a significant exposure to Fannie Mae, may be unable or unwilling to honour obligations should their financial strength continue to decline,’ the report said.”
http://www.prudentbear.com/index.php/archive_menu?art_id=502...
Global Credit Market Dislocation Watch:
March 19 – Dow Jones (Matthew Cowley): “JPMorgan Chase may have stepped in to save Bear Stearns, but that hasn’t stopped investors from worrying about counterparty risks. The weekend maneuver by JPMorgan and the Federal Reserve seems to be more about preserving Bear Stearn’s trades, rather than its business. That’s why the firm’s shareholders are being wiped out, but its mechanics will continue to operate under the auspices of its acquirer, JPMorgan Chase. Default by a counterparty is one of the major threats pervading crucial parts of the international financial system today; it's helped spread fear far beyond the origins of this crisis in the U.S. subprime market. The extent to which the Fed wants to avoid even testing a possible default by a major counterparty is indicative in the speed with which Bear's rescue plan was put together.”
March 20 – Bloomberg (John Glover): “The cost of protecting the bonds of Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Banki hf against default soared to records this week amid concern Iceland’s three largest banks may be unable to fund themselves. Credit-default swaps on Kaupthing, Iceland’s biggest bank, rose 22 bps to 855… The cost of the contracts is about seven times more than the average for banks in Europe…
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