Saturday, August 4, 2012

A Comment on CDS & Peter Tchir Says Put CDS On Exchange (Video)

First, I replied to this comment on my blog: http://www.distressedvolatility.com/2010/07/nice-to-see-cds-quotes-credit-default.html#comment-609492356

"OK, while it is nice to see CDS prices, how can a little guy buy/sell them? Did not think that was possible. If not, are they more than just interesting?"

"The little guy can't buy/sell CDS (bond derivatives) on exchanges like options on stocks. Not sure why these investment banks and exchanges never developed an active market for exchange traded mini-bonds and options. You can't buy the equivalent of 1 call or put option that is tied to 100 shares of stock. You have to drop like hundreds of thousands or in some cases a million to insure $10 million of debt. Right? So it's really a joke on the retail investor that can trade unsecured mini-bonds (like GM) with no insurance available, fraud penny stocks, and buy/sell unsecured consumer loans (notes) online on Prosper.com. It was basically a market built for large fees and to give large clients (hedge funds) or banks and financial insurance co's the ability to speculate on debt markets without actually owning bonds, or for large debt holders the ability to shift all of their default risk to the too-big-to-fail banks or AIG type insurance companies. We saw what happened with that. Or, credit traders put on these large capital arbitrage trades that misprice and distort credit risk in the system (Magnetar, JPMorgan, Paulson & Co., and Goldman's synthetic MBS CDOs) or cause synthetic credit portfolios at the too-big-to-fail banks to lose $5 billion+ in a few months with no change in overall market activity! See JPMorgan's recent whale trade for example http://www.distressedvolatility.com/2012/05/highlights-from-jamie-dimons-call-on.html (audio)....." (continue reading)

Peter Tchir, founder of TF Market Advisors and former head of index trading at RBS, told Lauren Lyster on RT's Capital Account that credit default swaps should be on regulated exchanges to mitigate systemic risk. And also to protect from risks related to what Lauren Lyster said, "dark, opaque deals." Watch his RT interview below. And then look at diagrams showing how credit default swaps work.



(Source: Wikimedia Commons)
(Source: Wikimedia Commons)

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