Wednesday, November 05, 2008

Phew! CDS, Its Just $33.6 Trillion Not $50 Trillion!!!


Dealbook: In the first of a series of weekly reports, the Depository Trust and Clearing Corporation said late Tuesday afternoon that there were a total of $33.6 trillion in credit default swaps outstanding on corporate, government and asset-backed securities. That is less than some earlier estimates of $50 trillion or more.

The company’s data provides a clearer picture of the money bet on the creditworthiness of the world’s companies and governments. The largest dollar amount of credit default swaps were written for protection against the debts of Turkey, Italy, Brazil, Russia and GMAC as of Oct. 31.

Others at the top of the D.T.C.C. list of 1,000 were Merrill Lynch, Goldman Sachs, Morgan Stanley, GE Capital and Countrywide Home Loans. In all those cases, however, the net notional values of the swaps were reduced considerably by hedging.

For example, Turkey was the leader in gross notional credit default swaps, at $188.6 billion, but its net notional exposure after hedging was $7.6 billion.

D.T.C.C.’s figures are available at Deriv/SERV on the D.T.C.C. Web site.

D.T.C.C. said that after this week the data would be shown in two sections. The first section shows the outstanding notional values at a given point in time (the end of each week). Starting next week, the second section will show data relating to the weekly confirmed trade volume, or “turnover,” with respect to the same underlying reference entities and indexes, as well as similar aggregations of such data.

The financial industry is trying to counter lawmakers, regulators and other critics who argue that the lack of transparency in the market for credit default swaps made the financial crisis worse.

“Publishing this data will provide greater transparency in a critical market,” said Tim Ryan, president and chief executive of the Securities Industry and Financial Markets Association, in a statement Tuesday. “This is an important initiative upon which the industry will continue to build.”

The collapse of Lehman Brothers contributed to a sharp drop in financial markets last month because no one knew how many credit default contracts were outstanding on the securities firm. Estimates ranged as high as $400 billion, although the actual amount turned out to be $72 billion, the DTCC said.

Comments: Well, its a very good start. Once you know the figures, its not a guessing game anymore. Then you isolate the top contracts and assess their likelihood of default. As we can see most of the trouble companies have been absorbed by other companies. There is one main danger I see, that is GE Capital, which will work its way back to General Electric. Its still a AAA company but if you were to examine its way of doing business, its a highly leveraged way, and more than 60% of profits are from the 100-200 basis points financing spread that they use to do business with clients, be it funding them or funding the transactions - e.g. consumer loans or even aircrafts (you want to buy an aircraft, let me lend you 90%).

As for country defaults, while its hyped up, only Iceland risk real default and maybe Turkey and Venezuela. The rest have to just tighten their balance sheets, get some billions from IMF and get on with it. Even Russia's demise is not exactly catastrophic, its bad no doubt, but not debilitatingly so.

Just a heads up, I am quite nervous on GE's near term prospects. Its $15 billion capital raising a few weeks back should raise alarm bells. Ratings agencies are again probably too slow to look deeply into how GE's business model is affected by the cascading impact on de-leveraging.

p/s photos: Izumi Mori

1 comment:

The Rock said...

risk. However there is talk that US govt may invest in financial firms that lend to corporates/consumers like GE Capital.

If the bad news come out, very likely GE's shares will be down a lot. But it will survive with govt help.