Mish's Global Economic Trend Analysis Message Board

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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: mishedlo who wrote (53175)	7/11/2006 3:46:12 AM
From: YanivBA	of 116555

Trouble unfolds in the CDS market The Financial Times has a strange little story today: ft.com It seems there is a small print article on the CDS that requires the insured party to hand over her bonds in order to claim compensation upon default. Not always that easy. Especially for reckless speculators such as (surprise?) Deutsche Bank. Apparently, Deutsche Bank bought the CDS in anticipation of a default without actually holding the bonds. That's a nice trick. I wonder how many days before the default that was. According to the Financial Times the bonds were not delivered in time because of a clog in the flow of paper but I have a conspiracy theory. Notice this paragraph in the story: -------- … the practice of entering into CDS contracts without actually owning the underlying bonds has certainly not vanished. On the contrary, the CDS industry has exploded so dramatically (see chart) that many bankers suspect that if a wave of corporate defaults ever occurs, it would be even harder than before to find enough corporate bonds to meet the terms of CDS contracts. … -------- I am not an expert on the CDS market so this is pure speculation but is it possible an issuer of CDS can sell more contracts than there are bonds? Nice profit if you can do that. I wander what the speculative holders of CDS contracts might think of this. Would they try to get the bond or would they sell the CDS? A significant drop in the CDS market is exactly what would be needed to put a few hedge funds under water. Higher risk premiums for everyone would probably follow. YanivBA

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