Credit Suisse CEO Seeks to Calm as Default Swaps Near 2009 Level
bloomberg.com
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I hope they don’t get bailed out by tax payers.
Any customers with accounts should be free to withdraw, but please don’t let the company operate if they were acting recklessly
But I wouldn’t fully rule out a bail out…look at the crazy policy of UK cutting taxes recently
I think that's what's in store for us here in Europe anyway.
We have no reasonable young workforce anymore (in term of numbers, that is), the competitive advantage provided by cheap Russian energy is gone forever, we didn't really get on the IT bandwagon, or, more exactly we slipped off it by the late 2000s (I'd say), the euro is not the world reserve currency and I could add some more. I honestly fail to see how Europe can avoid Japan's fate when it comes to its economy.
The real problem is that this became clear in 2007, and nothing was really done to fix it.
If you’re taking bail out dollars, you give up equity just like any other investment to save you. An eminent domain of sorts. Of course, all the usual criminal and civil charges for wrongdoing.
The point being: getting a bailout should be a terrible situation for the company too, there should be no incentive to play so riskily expecting that bailout to save you - if it comes, you might as well have gone under anyways, the result for you as an executive should be the same, but the externalities of firms that are too big to fail are mitigated
I know that people wanted the bankers to suffer for the damage they caused. And yes, there was a complete failure to actually criminally or civilly pursue the people responsible. Yes that was bad. But the 2008 bailouts were actually incredibly effective, and wiping out shareholders would largely have just robbed pension funds.
> Credit Suisse CEO Seeks to Calm [MARKETS] as Default Swaps Near 2009 Level
I don't know enough about the economical impacts of what a CDS is, but he fell into the trap of the Swiss-German way of communicating - direct, concise and transparent. With time, I learned to appreciate this way of working, but this is certainly not ideal when talking about the condition of a systemic bank a few months after coming into the office.
In particular, the two counterparties that enter a CDS contract will need to post 2 types of margin, variation margin and initial margin. Variation margin has exactly the level that if one of the counterparties defaults, and the market does not move, the other counterparty can replace the CDS contract at no loss. The initial margin is designed to cover the replacement cost even if the market moves quite violently.
Here's a tweet [3] from March this year that states that Initial Margin across the industry has topped one trillion dollars.
If this is not to your liking, what type of regulation do you have in mind?
[1] https://www.federalregister.gov/documents/2021/01/05/2020-27...
[2] https://www.bis.org/bcbs/publ/d499.htm
[3] https://twitter.com/clarusft/status/1529413987158396933?ref_...
One example of this is that you cannot insure something for more than it is worth (well, you can, but the insurers liability is limited to the actual cost of the loss). But you can amass a huge CDS position with no exposure at all to the underlying asset. If these instruments are just insurance against the underlying defaulting then that should not be permitted. If they're being used to speculate, that is fine, but then banks issuing them need to be upfront and say that they too are speculating. And whether we want strategically important, government backed organisations speculating is the question.
Also, forgive my ignorance: Doesn't only the issuer of a CDS need to post collateral? Unless the buyer is buying it on margin?
And yes it would be quite rare for a CDS not to be traded under a collateral agreement - in fact most these days are cleared (and as the case may be, netted) with a central counterparty to minimize a web of counterparty risk that might otherwise be problematic.
Similarly, I could try to buy CDS to protect against Tesla default, and then go and dynamite one Gigafactory and hope that Tesla does default, and I make a lot of money. But the law enforcement deterrence against that is huge. And if you are the type of criminal willing to break the law to such an extent, then there are simpler ways to make money. You could for example short the Tesla stock, or buy puts. Or you can just go and kidnap Musk, your sentence when you are caught will probably be lower.
2. Speculation. That's a loaded word. If you buy a bond issued by General Motors, is that speculation? You collect the coupon from GM, and you implicitly are placing a bet that GM will not default. Your action is helping GM invest in their newest assembly line. If you buy their stock, are you speculating? You are placing a similar bet, that GM will do quite well, and the stock will go up. Your action does not directly help GM (the money goes to the seller of the stock which is generally not GM), but it helps indirectly, by lowering GM's cost of funding.
When you sell insurance against GM's default, you are placing a similar bet that GM will do well. This too reduces GM's cost of funding (because it reduces their credit spread, which makes it easier for bond holders to hedge their exposure, and so to buy more bonds). I would say (and everyone else would say too) that selling CDS insurance is the opposite of speculation.
And by the way, in most cases it's hedge fund that sell this protection, not banks. Banks are just middlemen, they like to be "flat" risk. They buy about as much protection as they sell.
3. Buying CDS on margin. CDS is a swap, you buy on margin by definition. Both buyers and sellers of protection post collateral. Variation Margin is posted by only one (the party that is "out of the money"), and Initial Margin is posted by both.