|Possible Effects of Overlapping Credit Markets Fitch 2005|
"On 18 May 2006, Greenspan (speaking at the Bond Market Association) spoke eloquently about the stabilising effect of credit default swaps (“CDS”) on the international financial system
“The CDS is probably the most important instrument in finance. … What CDS did is layoff all the risk of highly leveraged institutions – and that’s what banks are, highly leveraged – on stable American and international institutions.”
We will critically examine whether the position espoused by Greenspan is in fact true." (read more)
It is amazing how fragile this market was and how CDS failed to contain it. There was even detailed data on subprime MBS deal performance.
Question: If retail investors were able to trade senior debt, leveraged loans, ABS, CMBS and credit default swaps alongside institutional investors using an online brokerage, would systemic risk have been mitigated with increased price transparency and liquidity? It is funny to me that retail investors are "accredited" enough to blow their money on penny stocks that have no underlying revenues, earnings or even capital, but not able to participate alongside hedge fund manager John Paulson in an ABX Index for pennies betting against pools of subprime mortgage-backed securities (trading insurance). Why couldn't a discount brokerage provide deal performance from data providers Lewtan, CoreLogic or Intex, like they provide S&P reports for stocks.
Look at this chart of select tranche spreads of ABX.HE indices (06-01 BBB, 06-02 BBB, 07-01 BBB, 06-01-BBB-, 06-02 BBB-, 06-03 BBB-) from this Nomura report in 2007. The report also breaks out "deal-collateral characteristics" for each series, "deal loan characteristics", "deal underwriting analytics" and "deal prepayment speeds". Were credit hedge funds and investment banks long MBS portfolios not watching this data? Or was it strictly a liquidity problem?
|Source: Nomura via Securitization.net|
I also stumbled upon this Bloomberg oped by Paul Wilmott on May 24, 2011 titled "Bankers Can’t Avoid Risk by Hiding It".