Commerzbank CEO Martin Blessing calls for the sovereign CDS market to immediately be shut down,...


Commerzbank CEO Martin Blessing calls for the sovereign CDS market to immediately be shut down, figuring if a 50% haircut on Greek debt doesn't trigger CDS payments, what will? "Government bonds cannot be effectively insured against default," he laments. Policymakers look to have been too smart by half. The rout in EU sovereign debt rose to a new level within hours of the Oct. 27 deal that enshrined bondholder losses while cleverly not triggering CDS payouts.
Comments (31)
  • spald_fr
    , contributor
    Comments (2814) | Send Message
     
    "Speaking the Truth in times of universal deceit is a revolutionary act."
    ~George Orwell
    19 Nov 2011, 10:09 AM Reply Like
  • wyostocks
    , contributor
    Comments (9114) | Send Message
     
    What I don't get is why anyone would pay for "insurance" knowing that the policy will never pay off no matter what happens.
    19 Nov 2011, 10:21 AM Reply Like
  • untrusting investor
    , contributor
    Comments (9903) | Send Message
     
    First it's not insurance, even though it should be. And second, that's the problem in that it no longer provides any type of a hedge, since the politicians and financial engineers "neutered" the effectiveness of CDS by manipulating the Greek deal to be "voluntary". And as a result all those holding EU trillions in debt now know they cannot hedge/insure those debt holdings. Hence the mass move out of EU debt and the large increases in EU debt interest rates.
    19 Nov 2011, 10:31 AM Reply Like
  • Tack
    , contributor
    Comments (16281) | Send Message
     
    wyo:

     

    P.T. Barnum had an answer for that one, and so much more.
    19 Nov 2011, 10:35 AM Reply Like
  • Tricky
    , contributor
    Comments (2434) | Send Message
     
    The most powerful force in the universe?

     

    Definitely not Gravity or the Weak Force. Many would argue for the Strong Force or the Electromagnetic Force.

     

    My vote -- the Law of Unintended Consequences.
    19 Nov 2011, 10:36 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (6205) | Send Message
     
    The answer is simple, because CDS are insurance, the sale of naked CDS should be prohibited for lack of insurable interest. Then hedgers can hedge, but speculators and manipulators will have to find a new way to attck their targets.

     

    From where it is, simply passing a law to retroactively invalidate all naked CDS would bring out who was actually trying to buy protection and who was trying to make a quick buck by bringing down the system.
    19 Nov 2011, 10:47 AM Reply Like
  • Tack
    , contributor
    Comments (16281) | Send Message
     
    Tom:

     

    Ben Stein proposed exactly such an approach over two years ago, saying that they should be summarily invalidated as "illegal gambling contracts against public policy."
    19 Nov 2011, 10:50 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (6205) | Send Message
     
    I've been pushing that point of view since I learned what CDS are. My background is insurance, and the minute I saw the things I could see the moral hazard created by insurance where there is no requirement of insurable interest.

     

    The damage done in the US by these things was horrendous, the CDOs stuffed with synthetic ABS a la Goldman Sachs and the Fabulous Fabrice, etc. The huge notional amounts on preferred targets, well in excess of the actual amount of debt involved, etc. It was and is the financial equivalent of arson or murder committed for the insurance proceeds.

     

    If the Europeans want to continue to permit this criminal enterprise, as our so wise and wealthy legislators have done, we can expect that they will have a repeat of out 2008-2009 experience.

     

    Add mark-to-market to the mix and it's cumbustible, very cumbustible. They could burn the whole global village down.

     

    http://seekingalpha.co...
    19 Nov 2011, 12:15 PM Reply Like
  • CaptainJJack
    , contributor
    Comments (594) | Send Message
     
    First, I do not see the controversy over the "voluntary" default.

     

    While it is true that the EU held a gun to the head of the EU banks and asked them to take a "voluntary" haircut, many bondholders did not participate, and if Greece defaults on those, the CDS will pay-off.

     

    Second, as for insurable interest, I don't see the difference between a CDS and derivatives, such as options. Would you require the same (i.e. no side bets) for an option contact or a put contract; that is, would you require that the option contract holder have an "insurable interest"?

     

    What about a futures contract? Would you require an insurable interest for, say, the wheat contract settling in July, 2012, so that only those who have wheat to sell, or have a legitimate need to buy, participate?

     

    In other words, I see the CDS contract as a risk transfer mechanism, just like an option or a futures contract, and I don't see the type of risk transferred making much difference.

     

    My problem with CDS contracts is that they are private, there is too much implied leverage, and Commercial Banks are some of the biggest players.

     

    I think if all of the CDS business were moved to open exchanges the systemic risk would be almost entirely eliminated. There is no reason to believe the bankers who say that CDS contracts need to be private or customized; there are already standardized CDS contracts that should cover 99% of the situations.

     

    The exchanges would mark them to market everyday, and establish collateral requirements that would be checked daily, just like they do with the zillions of other derivatives they trade.

     

    I think the only reason this hasn't been done already is that the banks involved would lose a lot of fees, and they have the strongest lobby in Washington.
    19 Nov 2011, 01:42 PM Reply Like
  • Tack
    , contributor
    Comments (16281) | Send Message
     
    Cap:

     

    What you illustrate for commodity futures is how it used to work, i.e., contracts could not be settled for cash, except at the agreement of both parties. That enforced discipline in the futures market because nobody wanted to awake to 100 railcar load of pork bellies on their front steps.

     

    The removal of that aspect of futures trading has led to all kinds of mischief and the volatility we now see. None of it is good.
    19 Nov 2011, 01:49 PM Reply Like
  • LKofEnglish
    , contributor
    Comments (4385) | Send Message
     
    the resulting effect was to blow up the EU. Can we now take Ben Stein in addition to his money? What a looney.
    19 Nov 2011, 02:21 PM Reply Like
  • LKofEnglish
    , contributor
    Comments (4385) | Send Message
     
    you're mixing private contracts with public ones. Insurance companies don't finance you deficit spending so "take care in your tone" mister. if Greece wants to "lie their way into the EU" that's their business. They know the consequences. If out of "charity" Europe decides "we need not annihilate Greece today because the CDS contracts have not been in actuality been actualized" is exactly how this CEO sees it: "the exactly wrong solution." Markets saw thought the bullshit immediately and hammered Greece even HARDER after this "clever ploy" was revealed. Italy is now "front and center" with elections in Spain right around the corner. Of course go ahead and blame the contract for the dishonor if you wish. the markets "already know the score" and are fleeing to gold vis a vis the euro.
    19 Nov 2011, 02:27 PM Reply Like
  • LKofEnglish
    , contributor
    Comments (4385) | Send Message
     
    not if Greece simply repudiates...as they and the rest of Europe will.
    19 Nov 2011, 02:29 PM Reply Like
  • CaptainJJack
    , contributor
    Comments (594) | Send Message
     
    I actually think that side-bets in the futures market are fine, and I think the ability to place side-bets leads to less volatility, not more.

     

    But, this only applies to open, regulated exchanges, like the CME.

     

    For me, the ability to take delivery of the pork bellies keeps everybody honest because the standard contract delivery provisions favor the seller (this is so the incentive for the buyer is NOT to take delivery) and is presumably reflected in the option pricing.

     

    But my point with Mr. Armistead is that the problem is that the CDS option contracts are NOT traded in an open exchange; they are traded by bankers in private contracts who keep the buyer and seller's names and positions a secret.

     

    Not only that, but some of the biggest commercial banks are involved, and, in general, their primary source of funding is the money you and I keep at their banks.

     

    So, my view is, if it is a secret contract and they are even holding depositor money (we've already seen that if things go wrong and they lose big enough, they can lose depositor money, too), then I agree with Mr. Armistead: let's have the insurable interest requirement; i.e. no side-bets.
    21 Nov 2011, 11:26 AM Reply Like
  • wyostocks
    , contributor
    Comments (9114) | Send Message
     
    I agree. Another solution is a fire wall between depositors money and the banks-----with----a mandatory long prison sentence for breaking the wall, a la, Corzine.
    Probably would not work because there wouldn't be enough prisons.
    21 Nov 2011, 11:30 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2862) | Send Message
     
    Taking away the ability to to buy insurance on something generally makes it less enticing to own. Where would home values be without home owners insurance?
    19 Nov 2011, 11:23 AM Reply Like
  • Tack
    , contributor
    Comments (16281) | Send Message
     
    Mike:

     

    Nobody is suggesting taking away "insurance."

     

    CDS should be treated and regulated as an insurance contract. As such that means 1) you must have an "insurable interest" and 2) the amount of your insurance is limited to the value of the asset one seeks to insure.

     

    Such alteration would eliminate entirely the wild speculative excess in CDS.
    19 Nov 2011, 11:27 AM Reply Like
  • wyostocks
    , contributor
    Comments (9114) | Send Message
     
    Mike
    I can't buy an insurance policy on my neighbors house to pay me off in the event his house burns down.
    19 Nov 2011, 11:30 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2862) | Send Message
     
    And in that case there should be no way governments can structure a deal to write down Greek bonds by 50% and not trigger a default. I'm going to go out on a limb and say that French and German banks are the ones that would have to pay out on these CDS, hence the careful structuring in trying not to trigger them.

     

    Also, I'm not sure how liquid these markets are, so I'm not sure how reliable the quotes are in terms of sentiment. Illiquid markets are easy to manipulate, and this is the deep end of the pool.
    19 Nov 2011, 11:37 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2862) | Send Message
     
    If your neighbor liked to carelessly play with matches, the way the Greeks carelessly piled on debt, wouldn't you like to explore your options on buying insurance that would pay off if your neighbors house burned down, since your property would surely be worth less with a smoldering pile of ashes next to it, rather than a house.
    19 Nov 2011, 02:01 PM Reply Like
  • Tack
    , contributor
    Comments (16281) | Send Message
     
    Mike:

     

    On the contrary, those buying insurance on property they don't own are more likely to have a high incentive to see it burn to the ground. That's precisely the problem with CDS trading; they don't own the house next door, or any house.
    19 Nov 2011, 02:07 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2862) | Send Message
     
    Right, I never said that you should or shouldn't be able to buy CDS without actually holding the bonds you are trying to hedge. I personally think the market is too small to pay much attention too, and too easily manipulated to be a metric that I think is worth following. My point is that eliminating insurance will drive prices down, not up. The market is clearly being manipulated, by speculators on one side and by the French and German's trying to structure "voluntary haircuts" on the other. Regulation is 100% needed to make this market function properly.

     

    Speculators in the market didn't force the Greeks to issue so much debt, or force Ireland to backstop Irish banks, or let Italians have an economy the size of California but be the third biggest debt market in the world. Blaming the speculators is just another example of the Europeans trying to pass the blame for inefficient economies and governments that are too large. If you don't want your house to burn down, you shouldn't pile kindling and lighter fluid against the base of it.
    19 Nov 2011, 02:23 PM Reply Like
  • LKofEnglish
    , contributor
    Comments (4385) | Send Message
     
    and so what happens when Greece needs a trillion dollar loan just to finance next years "spending"? Shall we forego the CDS then? Or just pay the 500 percent interest rate? Obviously your argument is as ridiculous as it is irrelevant now. This is a crisis and "new CDS contracts are being written to reflect this reality." Not that anyone in Europe can afford a single one now. "the market window has now closed on that."
    19 Nov 2011, 02:32 PM Reply Like
  • LKofEnglish
    , contributor
    Comments (4385) | Send Message
     
    i'm not sure how "liquid" these CONTRACTS are. they are just a contract after all--a "not so gentlemanly agreement" as it were. they all revolve around the same concept: is a country's word it's bond? i say "he who hesitates is lost" and so it is again. the Europeans are unclear what the repurcussions are...and so don't want the collateral calls that come with the CDS contract being effected. I say "the debt downgrades are far worse" for what happened in the USA is "it forced the instiutions to raise capital"...and nothing more. this whole thing is such a mess i don't even know where to begin actually...
    19 Nov 2011, 02:36 PM Reply Like
  • LKofEnglish
    , contributor
    Comments (4385) | Send Message
     
    if that's what they thought they're "rueing the day" as it were...as it "burned the whole City to the ground" thus destroying their neighborhood as well.
    19 Nov 2011, 02:38 PM Reply Like
  • LKofEnglish
    , contributor
    Comments (4385) | Send Message
     
    this is not "insurance"--Greece needed to get into the EU...this was a way to provide credit such that they could succeed upon entering. None of this would be even be considered if Germany had bailout out Greece as planned. GET THE WHOLE CDS THING OUT OF YOUR HEADS. The whole question is moot now as "can they even bail out their own banks" come to the fore.
    19 Nov 2011, 02:40 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2862) | Send Message
     
    The whole topic is CDS....and Greece has been bailed out twice already
    19 Nov 2011, 02:46 PM Reply Like
  • User 487974
    , contributor
    Comments (1101) | Send Message
     
    Rebellion to tyrants is obedience to God

     

    Do any of our fed heads have any idea of the meaning behind this statement?
    I fear not.
    Our President places his hand on a bible and swears to uphold the constitution and look how that has fared!

     

    This is the endgame folks! There really is not much more the powers that be can do to fu** up the global financial system. My fear now is they are going to "Collapse the system" ala "Cloward and Piven", get familiar with this progressive evil duo!
    Motor voter?

     

    O.W.S is no un planned insurrection, Stephen Lerner is so proud of his bastardized offspring. He's the head over at S.E.I.U. and Obama'a alma mater!
    Great weakness and cowardice attract each other.
    It is hard work and takes true inner self worth to lead and defend what is worth defending in times of societal breakdown!
    Leadership is absent the world stage!

     

    Where will our next George Washington come from?
    The congress has made themselves as irrelevant as Ben Bernanke and all the fed heads worldwide!
    Respect / credibility once lost will take generations to regain, if ever!
    This goes out to Bill Dudley at The New York Fed in particular!
    Bill, stop trying to prop up the markets with the bullsh** talk of more "IMPOTENT" and "Standard Of Living" crushing QE!
    The American people can no longer take any more of your perverted QE and U.S. Dollar destruction!
    Step back, do nothing for a change.
    Can not be any more destructive than all the intervention you have already unleashed on the country!
    Jerry
    19 Nov 2011, 11:32 AM Reply Like
  • LKofEnglish
    , contributor
    Comments (4385) | Send Message
     
    this may be true but "once the genie is out of the bottle"..."outcomes" as they say can be hard to control. i'm not sure it is true insofar as New York is concerned btw. there have been incidences from what are called "fringe elements" for sure. that does not mean the movement itself is lost however. indeed there is nothing to argue against the OWS as a movement to actually "root out crime" rather than as some claim "be a creator of it."
    19 Nov 2011, 02:44 PM Reply Like
  • EMS
    , contributor
    Comments (586) | Send Message
     
    Oh good. Do I get my money back with interest GS ????
    19 Nov 2011, 06:01 PM Reply Like
  • moreofthesame
    , contributor
    Comments (739) | Send Message
     
    CDS are a perfect example of a unnecessary product that contributes no true value to the community, all it does is turn the market into a big Casino. If somebody needs to insure their speculations then may be they shouldn't make those investments to begin with and if he insists on making them then be a man and take the losses. All this does is enhance the risks bankers take with money which is not their own.

     

    I am sick of large banks and investment firms where everybody wants to get rich but nobody is responsible for anything. A bunch of faceless girlie boys.
    20 Nov 2011, 12:55 AM Reply Like
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