Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold Price Drops Amid Stimulus and Poor Data - 21st Jan 21
Protecting the Vulnerable 2021 - 21st Jan 21
How To Play The Next Stage Of The Marijuana Boom - 21st Jan 21
UK Schools Lockdown 2021 Covid Education Crisis - Home Learning Routine - 21st Jan 21
General Artificial Intelligence Was BORN in 2020! GPT-3, Deep Mind - 20th Jan 21
Bitcoin Price Crash: FCA Warning Was a Slap in the Face. But Not the Cause - 20th Jan 21
US Coronavirus Pandemic 2021 - We’re Going to Need More Than a Vaccine - 20th Jan 21
The Biggest Biotech Story Of 2021? - 20th Jan 21
Biden Bailout, Democrat Takeover to Drive Americans into Gold - 20th Jan 21
Pandemic 2020 Is Gone! Will 2021 Be Better for Gold? - 20th Jan 21
Trump and Coronavirus Pandemic Final US Catastrophe 2021 - 19th Jan 21
How To Find Market Momentum Trades for Explosive Gains - 19th Jan 21
Cryptos: 5 Simple Strategies to Catch the Next Opportunity - 19th Jan 21
Who Will NEXT Be Removed from the Internet? - 19th Jan 21
This Small Company Could Revolutionize The Trillion-Dollar Drug Sector - 19th Jan 21
Gold/SPX Ratio and the Gold Stock Case - 18th Jan 21
More Stock Market Speculative Signs, Energy Rebound, Commodities Breakout - 18th Jan 21
Higher Yields Hit Gold Price, But for How Long? - 18th Jan 21
Some Basic Facts About Forex Trading - 18th Jan 21
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21
Gold Price Big Picture Trend Forecast 2021 - 13th Jan 21
Are Covid Lockdowns Bullish or Bearish for Stocks? FTSE 100 in Focus - 13th Jan 21
CONgress "Insurrection" Is Just the Latest False Flag Event from the Globalists - 13th Jan 21
Reflation Trade Heating Up - 13th Jan 21
The Most Important Oil Find Of The Next Decade Could Be Here - 13th Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Credit Default Swap Dealers the Big Winners from Fannie and Freddie Takeover

Interest-Rates / Credit Crisis 2008 Sep 09, 2008 - 01:38 AM GMT

By: Mike_Shedlock

Interest-Rates Best Financial Markets Analysis ArticleBloomberg is reporting 1.4 Trillion in Fannie, Freddie Credit-Default Swaps May Be Settled .
Investors may be forced to settle contracts protecting more than $1.4 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. seized control of the companies in a bid to bolster the housing market.

Thirteen "major" dealers of credit-default swaps agreed "unanimously" that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said.

"This is a big deal," said Sarah Percy-Dove, head of credit research at Colonial First State Global Asset Management in Sydney. "The market is not experienced at settling a credit event for a name of this size, so it is a bit of an unknown."

"Although the settlement effort will be massive, we do not see it as necessarily a negative," Gus Medeiros, credit analyst at Deutsche Bank in Sydney, wrote today in a research note. "Write downs are potentially an issue for holders of preferred equity, but the Treasury said financial institutions exposed to these securities will work with regulators to restore capital positions."

Largest Non-Event In history

I saw reported figures of $1.4 trillion of derivative blowups when I got up this morning, before I saw any real news. However, the market was not acting as if there was a $1.4 trillion blowup. The market was still functional. Whatever was going on, and lots of things were going on to be sure, but something that most assuredly was not going on was a $1.4 trillion event.

Big Payments Expected

The New York Times has a notable headline Big Payments Are Expected in Credit Default Swaps . Inquiring minds want to look at the details.
The government's takeover of Fannie Mae and Freddie Mac may lead to one of the largest ever payments in the credit default swap market, analysts said on Monday.

Losses to protection sellers, however, are expected to be minimal because of the high trading levels of the $1.6 trillion of outstanding Fannie Mae and Freddie Mac debt.

It is the first time a company in the benchmark investment-grade credit derivative index has had a credit event, a JPMorgan analyst, Eric Beinstein, said in a report on Monday.

“This will likely be the largest credit default swap credit event in terms of the amount of credit default swap contracts outstanding that has occurred,” he said.

When a credit event occurs, sellers of protection pay the buyer the full amount insured, and the buyer gives the seller debt underlying the contracts or a cash sum based on the debt's value.

“If bonds rally and trade close to par, recovery could be close to 100 percent, with sellers of protection having little to pay out despite a technical default,” CreditSights analysts said on Monday.

Technical Default

There was a default alright, technically, but that is about it. Earlier today I asked Chris Puplava at Financial Sense for a chart of Fannie and Freddie credit swaps. Here is that chart.

Fannie and Freddie Credit Default Swaps

Fannie and Freddie swaps were as high as 80 basis points in July. They are under 40 today in spite of the "default". To put things into perspective let's take a look at Washington Mutual (WM), Capital One (COF), and American Express (AXP) credit default swaps.

WaMu, Capital One, American Express CDS

Washington Mutual at 1400+ basis point vs. 30+ basis points for Fannie and Freddie just ought to put things into perspective as to what a non-event this was.

Over a trillion dollars were bet but it did not matter. Or did it? Let's go back to a statement from the first article.

Thirteen "major" dealers of credit-default swaps agreed "unanimously" that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today.

Hmm. Interesting that this was such a unanimous declaration. I wonder when the bulk of those CDS contracts were initiated. Could it by any chance be March or July of 2008? And who was on the other side?

Imagine betting on a default, getting it, and losing your ass. It seems to me that is what happened.

Who Lost?

  • Taxpayers
  • Small Banks holding F&F preferreds
  • Investors holding F&F common or preferreds
Who Won?
  • Thirteen "major" dealers of credit-default swaps.
Is this a great system or what?


By Mike "Mish" Shedlock

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2008 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Peter L. Griffiths
31 May 10, 12:14
Credit Default Swaps

The question arises as to whether Credit Default Swaps should be outlawed. The main weakness of Credit Default Swaps is that the loser may become bankrupt or need a bailout. This weakness could be corrected by setting a regulatory limit on the amount of the stakes.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules