CreditTrader

Broker Default Risk

The disconnect is simply due to the underlying backstop that the Fed put into the market. This has spread across much of the financials universe where we now see equity levels modestly cheap to where CDS would imply them to be BUT I do also note that implied vol is considerably too low among these names relative to their CDS levels - so a long delta-hedged Put versus CDS protection position should pay out well and also i would expect equity to underperform as the firms are forced to use equity issuance rather than debt/hybrids as Tier 1/leverage ratios come under pressure...love to hear your thoughts...