In our exploration so far of the very large put option contracts sold by Berkshire Hathaway, we have looked at the reasons to sell them (cheap float), the potential liabilities created and the mystery of Warren Buffett’s financial disclosure. Given what we thought we knew about the derivatives, it is strange that the accounting liability was not higher in the depths of the financial crisis.
On the way we have explored option pricing and the so-called greeks, as well as the revelation that Mr Buffet appears to have sold Lehman Brothers a rainbow, helped along by a series of smart contributions in the comments.
Indeed, those comments have inspired Professor Pablo Triana, Professor at ESADE business School, to return with another piece looking at the strange role of Berkshire’s own credit quality when it comes to valuing the derivatives, which may be the missing link in this valuation puzzle. Read more
Starting today we get what is basically the first formal step to a fully fledged market based deposit rate system from China (honourable mention of course to those more informal weapons of mass ponzi). It’s been coming and the move doesn’t effect corporates or individuals, but in the context of the Shibor spike, deposit pressure and the post-plenum reform blush it’s very worth noting.
From UBS’s Wang Tao:
[The PBOC] took the long-expected step toward liberalizing deposit rate on December 8, announcing that effective from December 9, depository financial institutions (banks) are allowed to issue large-denomination negotiable certificates of deposit, i.e., the so-called interbank CDs.
To regulators, naysayers and haters, the hedge fund industry has had one trump card to play for years: hey, we didn’t cause the financial crisis.
Cause the crisis? Maybe not. But a staff report lands from the New York Fed which suggests hedge funds did at least make it worse, adding to disruption in the credit markets that helped to seize up funding for US companies after Lehman Brothers collapsed. Read more
We had refrained from posting this helpful CDS explainer because a deal on the shutdown and debt ceiling appeared close earlier in the week, but now it seems our optimism was premature.
So, via strategists at Barclays: Read more
The European Commission has been investigating goings-on in the CDS world since Deutsche Borse and CME tried to enter between 2006 and 2009. The commission today said it’s reached a preliminary conclusion that — deep breath — ISDA, Markit, Bank of America Merrill Lynch, Barclays, Bear Stearns, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, Royal Bank of Scotland, and UBS all infringed EU antitrust rules. Deutsche and CME tried to get in and were denied exchange trading licences by ISDA, Markit, and the banks, says the commission.
From the statement (our emphasis):
Brussels, 1 July 2013
Antitrust: Commission sends statement of objections to 13 investment banks, ISDA and Markit in credit default swaps investigation
How many different types of risk can you name?
Operational risk, market risk, liquidity risk, legal risk, credit risk, etc. Now, let’s add “Isda risk” (pronounced Izzz-dah risk, it has the added benefit of making one’s risk manager sound like a rapper, which hopefully we all can agree is hilarious):
The nationalisation of the fourth largest bank in the Netherlands is proving to be a pain for the credit derivatives market. It’s only by virtue of the small number of contracts outstanding that referenced SNS Bank that this hasn’t been making more headlines and causing more consternation.
The Isda Determinations Committee has already declared that the expropriation of the subordinated debt of the bank was a restructuring credit event, and that there might be some auctions to determine payouts under the swaps. But it looks like that result of the auctions could prove a bit farcical, with buyers of protection walking away with very little compensation for the total loss experienced by subordinated debt holders. Read more
SNS Reaal’s sub expropriation was a restructuring credit event after all, according to 14 of the 15 Isda determinations committee members on Wednesday:
There can’t be many credit default swaps written on freshly nationalised SNS Bank. It isn’t among the publicly reported top 1000 single-entity CDS published by DTCC.
Nonetheless the question of whether the Dutch government’s expropriation of SNS subordinated debt constitutes a credit event, triggering payouts on the derivatives, is being debated on Tuesday by the Isda Determinations Committee, which serves as the ultimately arbiter in such cases.
By which we mean, they are debating it again — they decided the first time around to defer the question to get more information or something.
But why should anyone care about some contract that so few parties have an interest in?
Some possibilities below. Mentally circle any that apply. Read more
Commerzbank is arguing that we should all forget about the eurozone crisis for a bit where euro-dollar is concerned (with our emphasis):
At the same time a further improvement of the Spanish and Italian yield premiums no longer supports EUR-USD (see chart 1). Why? From the market’s point of view the crisis has eased sufficiently for German CDS to ease below 30bp for the first time since April 2010. That means the crisis is no longer sufficiently virulent to affect EUR-USD to the same extent as it did over the past 12 months.
Ever hear the word “innovation” and not be able to stop yourself from wincing? Then you probably work in financial markets.
With the above thought in mind, let’s play a special FT Alphaville edition of Mad Libs.
For those unfamiliar with the game, fill in the below blanks as per the instructions that accompany them. Then read the paragraph below, inserting the words you wrote into the appropriate spaces. Read more
That’s Portugal’s 5-year CDS back below 500bps for the first time since March 2011 (we threw in Spain and Italy too as they have tightened a fair bit
and we had load of chart space). Click to enlarge, data via Markit:
Whenever we come across a really real example of an actual client in the credit default swap market, it can be a little too exciting. Especially if they actually talk! They are ever so shy, you see.
But talk one did! To Nicholas Dunbar at Bloomberg. Read more
Friday’s rally in credit markets was no joke, as these charts from Markit Source shows:
Credit default swaps also want in on the “Spain’s [insert financial instrument] reach record highs” headlines. And they got their way on Monday morning:
Or, “More power to the cupcake police”. (Bear with us)
How is pricing within banks, and in markets more generally, policed? Read more
The world’s 81st-biggest island fell off the European Central Bank’s collateral lists on Tuesday. At least its sovereign debt did.
The credit derivatives industry has gone through the mother of all clean-ups over the last four years. It has standardised. The build-up of redundant contracts has been kept down. Hell, people even know which counterparties they are facing these days!
To make it even easier, there are quite specific rules to deal with various mechanics. Is it time to give the industry a pat on the back for a job well done? Read more
There was some chatter on Monday about whether the bailout of Spain’s banks could trigger credit default swaps that reference the sovereign. It centred around the question of subordination.
As Joseph pointed out earlier, it remains unclear whether that funds tapped from the European Stability Mechanism will be de facto senior. Read more
If you thought the headlines were bearish… you haven’t seen the bank quant models (the ones which presumably can’t read headlines).
Looking at SocGen’s latest cross asset quant research, the picture painted on all signal fronts is increasingly coming across on the dire side: Read more
Morgan Stanley’s research team came out with a note on Friday, guesstimating that JPMorgan’s losses on the synthetic credit portfolio held by its Chief Investment Office will come to $5bn by the end of the year, which is $2bn more than CEO Jamie Dimon seemed to think they’d come to when the announcement of the losses was first made on May 10.
Here are the analysts on why they don’t believe Dimon’s estimate (emphasis ours): Read more
The last twenty-four hours have brought us some interesting insights into the JPMorgan chief investment office’s $2bn loss story. The FT revealed that the CIO has been a huge player in certain structured asset markets. Some surmise that the trading activity from the unit has been so big that if it ceased participation in those markets, it could damage what liquidity there is in them.
There was also a story, this one written by the WSJ, about how CEO Jamie Dimon reacted when the stories about the “London Whale” first surfaced (pun intended). The article described how the positions were then investigated (internally) and the decision taken to delay a regulatory filing until the exact positions were better understood. Read more
A flurry of short-covering, encouraged by rumours that the Spanish authorities might re-introduce a ban on short-selling, saw Spanish bank stocks bounce on Friday.
But that “recovery” has not extended to the CDS market… Read more
Trust us, it isn’t easy to lose $2bn in a “synthetic credit portfolio” over five weeks from the beginning of April, as JPMorgan’s Chief Investment Office managed to do. A lot of analysts are scratching their heads wondering just how this feat was accomplished.
One would need a number of ingredients to even get close to pulling this off. A good helping of models that were trusted too much, as it seems the CIO’s value-at-risk (VaR) model was, is a good start. But one needs a bit more than that. Per Bloomberg: Read more
Throughout FT Alphaville’s coverage of the credit trades of JP Morgan’s Chief Investment Office, there were two thoughts that kept nagging us. We’d think about them whenever we wrote about the technicals the trades might be creating. One was: could this really happen under CEO Jamie Dimon’s watch? The other was: where the hell are the regulators in all of this?
We’ll get to these questions a bit later, as we would first like to review how the $2bn mark-to-market loss announced on Thursday may have happened… Read more
Back up a moment to remember what first brought JP Morgan’s Chief Investment Office to our attention.
It was a bunch of hedge funds complaining to journalists that big trades done by the CIO were causing the Markit CDX.NA.IG.9 credit index to become a lot cheaper than its component parts. Read more
After holding our heads in our hands and getting over a wave of nausea, FT Alphaville looked up and realised that yes, we really were looking at a trade idea involving credit default swaps that takes a view on the likelihood of an Israeli missile strike on Iran. It’s a ugly world. Thanks for the reminder, Nomura (emphasis ours):
The probability of a unilateral strike from Israel on Iran over the coming months has now fallen, while global concerns are shifting back towards Europe. We think this presents an opportunity to buy Israel credit against low-beta Europe. Read more
The Chief Investment Office of JP Morgan was the inspiration for FT Alphaville’s recent Whale Watching Tour.
It also prompted us to take a closer look at the recent, and rather remarkable, growth in trading in standardised credit tranches since the beginning of 2012. Such trades are effectively highly leveraged bets/hedges on the creditworthiness of corporations. Read more
On a scale of meh (0) to tin hats at the ready! (10), FT Alphaville is thinking that the bank-led synthetic securitisation market is currently at about a 3. While worth keeping an eye on, these bespoke deals are still relatively small beans compared to what the market was just before the crisis struck.
Meanwhile, the more standardised side of the corporate credit market, involving trades on credit indices, has seen an impressive growth in risk-taking and activity since the beginning of the year. Read more