free web tracker soliloquies: 06/08/2008 - 06/15/2008


so・lil・o・quy/- n. [C,U] a speech in a play in which a character talks to himself or herself, so that the audience know the character's thoughts.

Friday, June 13, 2008

cds crisis?

Today, I read an article at work about an uprising possibility of a crisis in the financial market regarding CDS and was greatly disturbed by the magnitude of its effect, if realized. CDS is a type of credit derivative which allows debt holders to hedge third party default risk through periodic premium payments. It's probably easier to imagine an insurance agreement between two counterparties on someone else's obligation. Anyway, I was astonished to learn that this market is already 54 trillion dollars in value: this is larger than the market value of all quoted stocks on the NYSE.

Remember the Bear Stearn's episode? Well apparently, JP Morgan-Chase was and still is a big player in this field. Before the collapse of Bear Stearns, many other financial institutions including JP Morgan had sold protection against Bear Stearns. If Bear Stearns went bankrupt, the amount of bad debt these sellers had to endure would've been HUGE and could've brought them down as well. Essentially, the Fed and JP Morgan acted that quickly to save all the players involved in this inadquately monitored haven of wacky financial instruments that's about to explode.

Apparently, next up on the list is Lehman. When I went to an internship at Bear Stearns Tokyo, I was shown by one of the credit trader's there how Bear Stearns' and Lehman's risk premiums were significantly higher than those of other investment banks. I guess that trend worsened and ultimately lead to BSC's collapse and Lehman's 60% decline of stock price.

Absolute terror...don't you think?

Article on Bloomberg