Whoa, hadn't seen this: credit insurance collapses on the firms getting taken over:
nytimes.com
But a closer look at the terms of this shotgun marriage, and its implications for a wide array of market participants, presents another intriguing dimension to the deal. The JPMorgan-Bear arrangement, and the Bank of America-Countrywide match before it, may offer templates that allow the Federal Reserve to achieve something beyond basic search-and-rescue efforts: taking some air out of the enormous bubble in the credit insurance market and zapping some of the speculators who have caused it to inflate so wildly.
Of course, it could be simple coincidence that the rescues caused billions of dollars (or more) in credit insurance on the debt of Countrywide and Bear Stearns to become worthless. Regulators haven’t pointed at concerns about credit default swaps, as these insurance contracts are called, as reasons for the two takeovers. (And Bank of America’s chief executive, Kenneth D. Lewis, has flatly denied that his deal with Countrywide was at the behest of regulators.)
Yet an effect of both deals, should they go through, is the elimination of all outstanding credit default swaps on both Bear Stearns and Countrywide bonds. Entities who wrote the insurance — and would have been required to pay out if the companies defaulted — are the big winners. They can breathe a sigh of relief, pocket the premiums they earned on the insurance and live to play another day.
Investors who bought credit insurance to hedge their Bear Stearns and Countrywide bonds will be happy to receive new debt obligations from the acquirers in exchange for their stakes. They are simply out the premiums they paid to buy the insurance.
On the other hand, the big losers here are those who bought the insurance to speculate against the fortunes of two troubled companies. That’s because the value of their insurance, which increased as the Bear and Countrywide bonds fell, has now collapsed as those bonds have risen to reflect their takeover by stronger banks.
We do not yet know who these speculators are, but hedge fund and proprietary trading desks on Wall Street are undoubtedly among them.
Talk about getting screwed by the Fed - these guys were spot on, buying insurance on a BSC collapse. Then the rescue makes their investment absolutely worthless.
Why is the Fed in the business of picking winners and losers? I don't like this at all...
`BC |
