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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: YanivBA who wrote (54599)	8/10/2006 7:28:34 PM
From: YanivBA	Read Replies (1) \| Respond to of 116555

CDS cash settlement GM Bankruptcy Risk Exposes Imbalance in Booming Default Swaps March 14 (Bloomberg) bloomberg.com The possible bankruptcy of General Motors Corp. has exposed flaws in trading of so-called credit default swaps because the number of contracts has outstripped the bonds they insure. The market's trade association, meeting this week in Singapore, is working to prevent disruptions by computerizing recordkeeping and permitting contracts to be settled with cash instead of bonds. ... The New York- based International Swaps and Derivatives Association plans to have a cash settlement system in place by June 20. Credit-default swaps were designed to protect creditors against non-payment of debts, and some investors now use them to bet on a company's credit quality. Contract buyers pay an annual fee and receive the full amount insured if a borrower defaults. Under the current system, buyers are obliged to deliver the defaulted loans or bonds to the insurer. `Lack of Transparency' The credit-derivatives market, dominated by credit-default swaps, is unregulated, with contracts traded over-the-counter and no requirement for investors to disclose their holdings. With more credit derivatives being traded than bonds available, a default by GM could spark panic buying of the company's bonds, driving up prices. The contracts would be worthless if prices rose to 100 cents on the dollar because investors would have to pay the same amount for the bonds as they received in payouts. ``The current method has the potential to significantly distort the economics of the trade,' says James Batterman, an analyst at Fitch Ratings in New York. ``There are no limits on the amount of derivatives exposure vis-a-vis deliverables, and a lack of transparency as to how many contracts there are in existence.' ... JPMorgan and Goldman Sachs are among the biggest buyers and sellers of credit derivatives. ... Incomplete recordkeeping lies at the heart of the fragility of the credit-derivatives market, and cash settlement won't solve the problem. ``Cash settlement will help get around the bond scarcity problem, but if you don't know the who, what and how much, it will be futile,' says Mike Greenberger, a law professor at the University of Maryland and a former director of trading and markets at the Commodity Futures Trading Commission, the U.S. futures market regulator. ``I continue to worry about this market.' ... Dana's 5.85 percent 2015 bonds have risen 10 cents to 74 cents on the dollar since the company filed for bankruptcy protection. They traded for about 60 cents on the dollar Feb. 24, when the Wall Street Journal reported Dana had hired Miler Buckfire & Co., which advises companies in financial distress. ... Marilyn Cohen, the president of Envision Capital Management in Los Angeles, says she is concerned the flood of credit derivatives may skew prices in the bond market, hurting retail investors like her clients. ``God forbid if GM files for bankruptcy,' says Cohen, who oversees $225 million of bonds, including those of GM's finance unit. ``What will it do to the market? We have nothing but questions, and no answers.' I'll try to find out what happed to that cash settlement by June 20 statement. YanivBA.