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Ambac Faces 99% Chance of Default as Deadline Looms, Swaps Show

The $26.5 trillion (gross notional) CDS market is under siege. Or such is the latest news from the formerly pervasive (ab)user of CDS trading strategies, David Einhorn. In an op-ed in the FT, Einhorn states "I think that trying to make safer credit default swaps is like trying to make safer asbestos,” he writes in a recent letter to investors, adding that CDSs create “large, correlated and asymmetrical risks” having “scared the authorities into spending hundreds of billions of taxpayer money to prevent speculators who made bad bets from having to pay." His full opinion can be found here,...

http://www.bloomberg.com/apps/news?pid=20601109&sid=a7T5HaOgYHpE

Citi sues Morgan Stanley over CDS, claims $245 mln Sat Sep 26, 2009 3:35am BST NEW YORK, Sept 25 (Reuters) - Citigroup Inc (C.N: Quote, Profile, Research) sued Morgan Stanley (MS.N: Quote, Profile, Research) on Friday for breach of contract, saying the Wall Street firm owed it $245.4 million for protection it bought on a loan. Citibank bought a credit default swap (CDS) from Morgan Stanley & Co International in 2006 on a $366 million revolving credit facility it provided to an issuer of collateralized debt obligations (CDO), according to the complaint filed in U.S. District Court in Manhattan. The...

Should the Fed Get Into the CDS Business? Exotic financial instruments known as credit default swaps played a central role in the crisis that brought the U.S. economy to its knees last year. Ricardo Caballero and Pablo Kurlat, two M.I.T. economists, have an audacious response: The Federal Reserve itself should get into the credit default swap business to prevent the next crisis. Their proposal will be debated today at the Fed’s annual Jackson Hole, Wyo., symposium by the world’s leading central bankers and economists. Harvard’s Kenneth Rogoff, former chief International Monetary Fund economist, will present a critique. A credit default...

Link Only (Bloomberg excerpts contained) http://seekingalpha.com/article/154926-california-as-national-trend-setter-in-this-case-let-s-hope-not

Congress should compel over-the-counter (OTC) derivatives dealers to publish monthly the pricing models they use or register the models with the Securities and Exchange Commission, says risk analyst Christopher Whalen. Disclosure will reduce the complexity of derivatives. Even so, an outright ban is preferable to eliminate the "horrible damage" they have inflicted on the global financial system, Whalen contends in his written answers to 33 questions submitted by a Senate panel following his testimony last month. Mind Over Market has obtained a copy of Whalen's letter containing the Senators' questions and his answers, and has published the entire text below....

Today’s Wall Street Journal carries the amazing story of a small Texas brokerage that pulled a fast one on some of the biggest banks in the world. The short version goes like this. Amherst, the Texas brokerage, and others sold hundreds of millions of dollars of credit default swaps on bonds back by $29 million of subprime mortgages to JP Morgan, Goldman, UBS RBS and other banking giants. The banks paid steeply for the swaps—up to 90 cents for every dollar of insurance—but thought it was easy money. After all, these were Lehman packaged California subprime loans made in 2005,...

Kabuki on the Potomac: Reforming Credit Default Swaps and OTC Derivatives May 18, 2009 /snip We gratefully acknowledge contributions for today's comment from members of the Herbert Gold Society, an informal group of current and former employees of the U.S. Treasury and the Federal Reserve System. Despite bringing the world economy to its knees and costing taxpayers hundreds of billions of dollars in bailouts for events such as Bear Stearns, Lehman Brothers and American International Group (NYSE:AIG), the Masters of the Universe who run the largest Wall Street firms of have learned not a thing when it comes to credit...

Credit insurance hampers GM restructuring By Henny Sender in New York Published: May 11 2009 23:33 | Last updated: May 11 2009 23:33 Hedge funds and other investors stand to make billions of dollars on credit insurance contracts if GM de­clares bankruptcy, a prospect that is complicating efforts to persuade creditors to agree to a restructuring plan for the automaker, analysts say. Holders of $27bn in GM bonds have until June 1 to decide whether to swap their debt for a 10 per cent equity stake in the company as part of an offer that would give the US government...

CDS blamed for role in bankruptcy filings By Henny Sender in New York Published: April 17 2009 00:57 | Last updated: April 17 2009 00:57 Credit default swaps, the derivatives instruments that have figured prominently in the global financial crisis, are now being blamed for playing a role in two bankruptcy filings this week. Bankers and lawyers involved in restructuring efforts say they are concerned some lenders to troubled companies, such as newsprint producer AbitibiBowater and mall owner General Growth Properties, stand to benefit from a default because they also hold default swaps, which entitle them to payments in such...

Where's My Pitchfork? President Obama was said to have recently had a meeting in which he said: But President Barack Obama wasn’t in a mood to hear them out. He stopped the conversation, and offered a blunt reminder of the public’s reaction to such explanations. “Be careful how you make those statements, gentlemen. The public isn’t buying that.” “My administration,” the president added, “is the only thing between you and the pitchforks.” Yes, Mr. President, you are. But let's be blunt - should your administration be exempt from the pitchforks? Let's set the wayback machine to December 29th, 2007. On...

Exclusive: AIG Was Responsible For The Banks' January & February Profitability Posted by Tyler Durden at 6:35 PM Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turns keeps on duping U.S. taxpayers into believing everything is good. I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety: "AIG-FP accumulated thousands of trades over...

Treasury Secretary Tim Geithner said that he likely will not ban one of the key financial instruments that led to the collapse of AIG and a number of other institutions. "My own sense is that banning naked default swaps isn't necessary and wouldn't help fundamentally in this case," Geithner told Rep. Joe Donnelly (D-Ind.) when asked about the value of the instrument. Credit default swaps were insurance policies offered by AIG and other companies on bundles of toxic assets, allowed under the assumption that increasing property values would fuel increased value for mortgages. Under those assumptions, the credit default swaps...

“Concentrations of risk, plagued with deadly correlations” Posted on Tuesday, March 17th, 2009 By bsetser The FT’s Gillian Tett makes a simple but important point: AIG’s role in the credit default swap market meant that a lot of risk that the bank regulators thought had been dispersed into many strong hands ended up in a single weak hand. Tett: /snip But the AIG list shows what the fatal flaw in that rhetoric was. On paper, banks ranging from Deutsche Bank to Société Générale to Merrill Lynch have been shedding credit risks on mortgage loans, and much else. Unfortunately, most of...

Satyajit Das's Blog - Fear & Loathing in Financial Products Credit Default Swaps – Exercises in Surrealism Posted At : March 16, 2009 5:35 AM | Posted By : Satyajit Das Related Categories: Derivatives At the quantum level, the laws of classical physics alter in intriguing ways. In financial markets, at the derivative level, the rules of finance also operate differently. The derivative industry’s indefatigable advocacy of credit default swaps (“CDS”) centers on the fact that contracts related to recent defaults settled and the overall net settlement amounts were small. Closer scrutiny suggests causes for caution. The CDS contract is...

More GE (IMPORTANT) Off the wires, no link. "DJ reports GE Capital credit default swaps worsen even as GE released a statement emphasizing its strong cash position. The CDS are most recently quoted at 17.5 points up front, from 16.5 points up front earlier today, according to Phoenix Partners Group. That means investors must pay $1.75 mln up front, plus a $500,000 annual fee, to protect $10 mln of GECC senior bonds against default for five years." That means the first year cost is $1.75 + $500k, or $2.25 million. That's 22.5% first year cost to insure $10 million against...

Here in a nutshell is why I think Obama will preside over a prolonged world depression with extreme consequences for the developing world: Americans, per my Peter Pan analogy, haven't been saving. They expected their homes and other assets to appreciate instead. Now the Boomers are broke just prior to retirement and are saving as much as they can. If everyone tries to save at once, the economy shuts down and stays shut -- it has nothing to do with the credit crisis. The only way to save without shutting the economy down is to export (as the Chinese have...

ICE Trust Receives Approval From Federal Reserve to Clear Credit Default Swaps --ICE Expects to Complete TCC Acquisition within Week; Clearing of Existing North American CDS Indexes to Begin Thereafter NEW YORK, March 4, 2009 /PRNewswire-FirstCall via COMTEX News Network/ -- IntercontinentalExchange(R) (NYSE: ICE), a leading operator of regulated global futures exchanges and over-the-counter (OTC) markets, today announced that ICE US Trust, LLC (ICE Trust), a New York limited liability trust company, has received regulatory approval from the Board of Governors of the Federal Reserve System to become a member of the Federal Reserve System and to serve as a...

What Is Really Killing the Big Banks?   By Christopher Whalen | Friday, February 13, 2009   As the Obama Administration performs triage on the housing and credit markets, one of the most damaging aspects of the financial crisis has been largely overlooked. Christopher Whalen, hailed by Nouriel Roubini as one of the leading independent analysts of the U.S. banking system, explains the problem of credit default swaps.One of the least understood aspects of the financial crisis — but potentially the most damaging — is the market for over-the-counter derivatives and particularly one type of derivative known as a...

50% Chance NYC Will Default On Its Debt In 5 Years Joe Weisenthal|Mar. 3, 2009, 6:16 AM|1 Even if the economy stabilizes a little, it's really hard to see how New York is going to solve its budget woes, given the collapse of Wall Street, big media and real estate. A combination of a bad economy, lower public services and higher taxes could make the city toxic for years to come. No wonder than that credit default swaps on the city's debt are trading at all time wide spreads, implying a 50% chance of default within five years, according to...

Talking Shop With a ‘Vulture’ Investor 2/27/09 at 3:20 PM In the financial industry, there used to be a niche specialty called "distressed investing." Some called these folks vultures, because in the aftermath of a collapse, they would go swooping in to buy up the wreckage on the cheap. That's not much of a specialty anymore — the state of the market means we're pretty much all vultures now. But we thought we could get some perspective by getting in touch with an old friend who is on the front lines — he trades at one of the most established...

Government Risk Rises: Credit Markets Face Structural Collapse by: Rakesh Saxena January 26, 2009 As credit default swap spreads for 5-year British government debt rose to 150 basis points last week, one European regulator raised a significant concern regarding the balance sheets of banks on both sides of the Atlantic. "If you follow the rating agencies, well and good, but if you apply default risk prices to banking assets, capital adequacy ratios of nearly all western banks are open to question," she warned, after watching Euro-based spreads on U.S. government debt rising to 75 bps, and after noting that few...

Downgrades And Downfall How could a single unit of AIG cause the giant company's near-ruin and become a fulcrum of the global financial crisis? By straying from its own rules for managing risk and then failing to anticipate the consequences. By Robert O'Harrow Jr. and Brady Dennis Washington Post Staff Writers Wednesday, December 31, 2008; A01 Third of three parts The contracts were flying out of AIG Financial Products. Hardly anyone outside Wall Street had ever heard of credit-default swaps, but by early 2005, investment banks were snapping them up to insure all kinds of deals in case of default,...

ome Credit Suisse Group bankers were left reeling after the bank said it would pay a substantial percentage of their 2008 compensation with an illiquid group of junk bonds, mortgage-backed securities and corporate loans. The move Thursday represents a radical revamp for the Swiss bank, which posted as much as $4.6 billion in losses so far this year, a number that could increase when it announces full-year earnings. For years bankers had received about half their compensation in cash, and the rest in stock. This year, up to 80% of the stock portion will come via what Credit Suisse is...

Deutsche Bank likely to reveal losses of $1 billion Fri, Dec 12, 2008 Deutsche Bank AG, shaken last quarter by a $1.68 billion loss trading or the firm’ account, is reeling again, this time from about $1 billion of bad bets in a unit led by credit-trader Boaz Weinstein in New York, people familiar with the matter said. The magnitude of the group’s loss, and its impact on the firm’s fourth-quarter results, remain uncertain as the value of some stakes gyrate with the markets and the Frankfurt-based bank seeks to unwind positions, according to the people, who declined to be...

NEW YORK (Reuters) – Bernard Madoff, a long-time fixture and powerful adviser on Wall Street, was arrested and charged on Thursday with allegedly running a $50 billion Ponzi scheme, U.S. authorities said. The former chairman of the Nasdaq Stock Market who remains a member of Nasdaq OMX Group Inc's nominating committee, is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he founded in 1960. But the alleged fraud involved a hedge fund he ran from a separate floor of the building where his brokerage is based. Madoff told senior employees of his...

Every passing day brings more news of more financial bailout requests and more congressional promises for more taxpayer funded bailouts. It's as if the concepts of freedom and capitalism have gone completely missing in Washington DC today. What started a few weeks ago as a $70 billion dollar mortgage crisis (caused by congressional Democrats) has fast become a multi-trillion dollar international disaster that crosses all industry boundaries. According to the same illustrious leaders in Washington DC who caused all of it to begin with, only printing more play money and putting American taxpayers even deeper in multi-generational debt, is the...

A new Citigroup scandal is engulfing Robert Rubin and his former disciple Chuck Prince for their roles in an alleged Ponzi-style scheme that's now choking world banking. Director Rubin and ousted CEO Prince - and their lieutenants over the past five years - are named in a federal lawsuit for an alleged complex cover-up of toxic securities that spread across the globe, wiping out trillions of dollars in their destructive paths.

"Effectively, there isn't any CDS market now." David Goldman, an old friend and credit strategist turned private investor, still goes through the credit run sheets from the dealers. "The business looks like the window of a Brezhnev-era Soviet butcher shop. Mouldy scraps hanging in the window. Old women lining up at 4am to try and buy credit protection on General Motors (NYSE:GM) . What are reported as trades are really ways to establish prices to satisfy the auditors." For several years, I have been among those calling for thoughtful, prudent, moderate steps for the reform of the credit default swaps...

US Treasury 10-yr CDS hits record high Mon, Dec 1 2008, 11:34 GMT http://www.afxnews.com LONDON, Dec 1 (Reuters) - The spread or risk premium on 10-year U.S. Treasury credit default swaps hit a record high on Monday, extending a recent trend as market participants continued to fret about the scale of the government's financial rescue programmes. Ten-year U.S. Treasury CDS widened to 68.4 basis points from Friday's close of 60 basis points, according to credit data company CMA DataVision. Five-year Treasury CDS widened to 52.5 basis points from 46 basis points at Friday's close, it said. (Reporting by Emelia Sithole-Matarise)

Insight: Annihilation on Main Street By Mark Sunshine Published: November 27 2008 15:54 | Last updated: November 27 2008 15:54 Warren Buffett called credit default swaps “financial weapons of mass destruction” and they are about to annihilate Main Street. In a disturbing new trend, international banks are creating syndicated credit facilities that “weaponise” credit default swaps (CDS) by using the trading price of a borrower’s CDS to set the interest rate paid by the borrower. Unfortunately, banks don’t understand that they are arming speculators to ambush and kill unsuspecting and otherwise healthy companies. Regulators are oblivious to this danger as...

UPDATE 1-U.S. Treasury CDS hit record wides-CMA DataVision Mon Nov 24, 2008 11:21am EST (Adds background) NEW YORK, Nov 24 (Reuters) - The spread or risk premium on 10-year U.S. Treasury credit default swaps hit record wide levels on Monday, prompted by worries about how the cost of rescuing banks and carmakers would affect U.S. creditworthiness, CMA DataVision said. As the global financial crisis worsened in recent weeks, traders increased their bets on the bigger toll of the U.S. government's array of programs to help these ailing industries. Ten-year U.S. Treasury CDS edged out to 49.8 basis points from 49.3...

Citi shares in record slump, CDS spreads widen Bank takes on $17 billion of SIV assets, shuts another hedge fund By Alistair Barr, MarketWatch Last update: 4:41 p.m. EST Nov. 19, 2008 SAN FRANCISCO (MarketWatch) -- Citigroup Inc. shares slumped a record 23% Wednesday and credit-default swap spreads on its debt widened after the bank took on more than $17 billion in assets from structured investment vehicles and shut another hedge fund. Citi shares slumped 23% to close at $6.40. The previous biggest one-day drop was 21.7% during the market collapse on Oct 19, 1987. CDS spreads on Citi were...

Uncle Sam's Credit Line Running Out? By RANDALL W. FORSYTH The yield curve and credit-default swaps tell the same story: The U.S. can't borrow trillions without paying a price. WHAT ONCE WAS UNTHINKABLE has come to pass this year: massive bailouts by the Treasury and the Federal Reserve, with the extension of billions of the taxpayers' and the central bank's credit in so many new and untested schemes that you can't tell your acronyms or abbreviations without a scorecard. Even more unbelievable is that some of the recipients of staggering sums are coming back for a second round. Or that...

INSIGHTSCredit Default Swaps: 'Financial WMDs' By Theodore F. di StefanoE-Commerce Times 10/31/08 5:30 AM PT We are all painfully aware of what is happening on Wall Street. In fact, I think that it might take several years for the stock market to regain the value that it has lost in the past year (approximately 35 percent).No doubt, there is plenty of blame to go around as to who is primarily responsible for this financial debacle. However, most experts agree that a prime candidate for blame is the credit default swap. Credit Default Swaps Explained Michael Greenberger, a former staff member...

AIG's crucial role in the banking collapse Oct 09, 2008 Something very strange is happening in the financial markets. And I can show you what it is and what it means... If September didn't give you enough to worry about, consider what will happen to real estate prices as unemployment grows steadily over the next several months. As bad as things are now, they'll get much worse. They'll get worse for the obvious reason: because more people will default on their mortgages. But they'll also remain depressed for far longer than anyone expects, for a reason most people will never...

October 11, 2008 Lehman Brothers demise triggers huge default Tom Bawden in New York and Suzy Jagger in Washington Lehman Brothers, the bust investment bank, triggered one of the biggest corporate debt defaults in history yesterday as it emerged that the US Federal Reserve is harbouring grave concerns about whether Washington’s $700 billion (£413 billion) bailout fund will avert a financial meltdown. An auction of Lehman’s bonds yesterday determined that the bank’s borrowings were worth only 8.625 cents on the dollar. The valuation leaves the insurers of the debt a bill of about $365 billion. It is not clear whether...

Financial crisis: Lehman Brothers liabilities sale fails to pacify market A fresh wave of fear hit banks yesterday as traders tried to settle hundreds of billions of pounds of complex products in a move that could leave some with heavy losses. By Katherine Griffiths, Financial Services Editor Last Updated: 11:24PM BST 10 Oct 2008 An auction to settle insurance liabilities over the collapse of Lehman Brothers has caused fresh anxiety A sale of complex products relating to Lehman Brothers caused new anxiety Photo: REUTERS The cause of the anxiety was an auction to settle insurance liabilities over the collapse of...

While some blame the greed of Wall Street investment bankers and the dangers of a totally unregulated system for the current financial crisis, what can’t be denied is that lives, and lifestyles, have been suddenly changed across the social spectrum and careers built up over a lifetime have vanished in an instant. Apart from the revised $700 billion bailout plan, can the U.S. government do enough to restore confidence and assuage the trauma? The real question is: Who is going to compensate the common investors across the world who have lost their wealth in the resultant market meltdown? The...

How AIG's Collapse Began a Global Run on the Banks By Porter Stansberry Something very strange is happening in the financial markets. And I can show you what it is and what it means... If September didn't give you enough to worry about, consider what will happen to real estate prices as unemployment grows steadily over the next several months. As bad as things are now, they'll get much worse. They'll get worse for the obvious reason: because more people will default on their mortgages. But they'll also remain depressed for far longer than anyone expects, for a reason most...

Short-selling on U.S. states can pay off By Mary Williams Walsh Friday, October 3, 2008 While regulators were sprinting to save the financial system last month, someone was making a lot of money — by betting against the State of New Jersey. It is not clear who. But trading records suggest that in the panicked days when exotic derivatives were bringing the American International Group to its knees, traders were using the same kinds of derivatives, called credit-default swaps, to profit from New Jersey's rising tide of red ink. Speculators have long been able to short-sell stocks, making money when...

Is Credit Default Swap Litigation the Next Big Thing? Robin Sparkman 10-03-2008 It seems that hardly a day goes by anymore without someone predicting with utmost confidence that boom times for litigators are just over the horizon. Thursday's prognostication, courtesy of a media lunch hosted Wednesday by Paul, Hastings, Janofsky & Walker: It's going to be all about the credit swaps. Robert Claassen, chair of the firm's derivatives group, and Keith Miller, chair of the credit crisis group, told reporters that the banking industry's implosion means that banks with a piece of the $43 trillion market in these unregulated instruments...

Excerpt... 1. Counter-party risk has risen dramatically and is the most significant. ISDAs have to be renegotiated (especially in light of the market disruptions like short-selling). Credit lines have to be reviewed with almost every client. Risk officers are preventing larger trades from being completed and demanding higher collateral levels from clients. Most important are the huge risks of counter-parties blowing up and not being able to pay their obligations. ...

Derivatives Pose New Wrinkle in Lehman Case 'A Huge Amount of Uncertainty' By JULIE SATOW, Staff Reporter of the Sun | September 25, 2008 http://www.nysun.com/business/derivatives-pose-new-wrinkle-in-lehman-case/86595/ Bankruptcy lawyers and law professors are preparing for a journey into uncharted territory as the credit default swaps market gets dragged into the Lehman Brothers bankruptcy proceeding. "The courts have dealt with credit default swaps very infrequently, and certainly not at the scale they are now out there," a lawyer at Washington, D.C.-based Caplin & Drysdale, James Wehner, said. "We have a new law and a new financial phenomenon, so there is a lot of...

NYS TO REGULATE SWAPS Last updated: 10:03 am September 23, 2008 Posted: 3:49 am September 23, 2008 New York State will start regulating a part of the $62 trillion market for credit-default swaps, calling it a culprit in the global financial crisis. Credit-default swaps are contracts that act as insurance policies to protect against debt default and should therefore be treated as insurance, Governor David Paterson said in a statement yesterday. State insurance regulators would require sellers of the swaps to show they can actually pay the claims if there is a default.

A nuclear winter? Sep 18th 2008 From The Economist print edition The fallout from the bankruptcy of Lehman Brothers WHEN Warren Buffett said that derivatives were “financial weapons of mass destruction”, this was just the kind of crisis the investment seer had in mind. Part of the reason investors are so nervous about the health of financial companies is that they do not know how exposed they are to the derivatives market. It is doubly troubling that the collapse of Lehman Brothers and the near-collapse of American International Group (AIG) came before such useful reforms as a central clearing house...

. What is counterparty risk, and why is it suddenly an issue? In the simplest terms, counterparty risk is the chance that the person on the other side of a deal - the counterparty - won't be there when it's time to pay up. Take an example most people can relate to: Selling a home. There's always the chance that when it comes time to close the deal a month or so down the road, the buyer won't show up or won't have the money. In financial markets, traders and banks are constantly thinking about counterparty risk. When they make...

AIG shares slump, says 'everything on the table' Insurer may sell Transatlantic stake, other businesses to raise capital By Alistair Barr & John Spence, MarketWatch Last update: 5:42 p.m. EDT Sept. 12, 2008 SAN FRANCISCO (MarketWatch) -- Insurance giant American International Group, beset by a record stock slump and a possible cut from ratings agency Standard & Poor's, said Friday it was reviewing its businesses and that "everything was on the table," suggesting it might sell assets to raise capital and avoid a crippling downgrade. The company had been preparing for a major reorganization announcement on Sept. 25, but on...

Fannie and Freddie's New Derivatives Cliffhanger The bailout triggers settlement of $1.4 trillion in unregulated credit-default swaps. Do the hedge funds have the money? by Ben Levisohn In taking over Fannie Mae (FNM) and Freddie Mac (FRE), Henry M. Paulson Jr. and the U.S. Treasury Dept. cleared up uncertainty surrounding the companies' common stock, preferred shares, and senior and subordinated debt. But Uncle Sam's intervention also triggered a default event, according to the International Swaps & Derivatives Assn., and now roughly $1.4 trillion in outstanding credit-default swaps, a type of derivative contract, must be settled. You remember the credit-default swap...