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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: forceOfHabit who wrote (101190)	2/12/2009 1:12:48 AM
From: Hawkmoon	Respond to of 110194

Leverage now for the CDS is 200:1. Its certainly not unlimited, but you can see how, with a portfolio of this stuff, inadequate risk management, and a little poetic license Soros might have called it "practically unlimited". Maybe not "unlimited" but pretty damn close. The point that Soros was making, IMO, is that it's too risky to issue bonds in any quantity when it's so easy to manipulate the price of them via both going long the CDS (especially when no one wants to take the other side) and shorting the actual issuer's stock in order to make them appear a "bad risk". Anything can be made to appear to be a bad risk if I can force the value of the asset, or underlying collateral to diminish. Who buys the other side of that CDS contract Habit? Who can afford the risk of 200:1 (or even 20:1) exposure when the other guy can only lose 100% of his investment? It certainly isn't the financial surety sector which is in shambles at the moment because the Ratings Agencies DELIBERATELY over-stated the credit worthiness of those financial instruments. AIG, if I understand it correctly, got in trouble writing those those CDS contracts because they trusted Moody's, S&P, and Fitch and had to price accordingly. Their risk management analysts believe the RAs, despite the fact that the RAs had a definite COI with the issuers of the affected instruments. In sum, as I understand it, the CDS markets have become a literal wild west frontier where a speculator doesn't even need to have an actual interest/stake in the fate of the underlying bond. They just hope to profit off the CDS spreads by piling on and creating the impression the the bonds are about to default. If there isn't enough capital available to take the other side of those CDS transactions, the "shorts" wind up in control of the entire bond markets, tearing up any issuances that dare to show their face in the bond markets (except treasuries). This is why I believe the banks aren't lending. Who would want to expose their capital to such a risk exposure? Hawk