Why Aren't CDS Indices Streaming On CNBC? Make Credit Default Swaps Available To Retail Investors [ABX, CMBX, CDX, MCDX]

Why aren't CDS indices streaming on CNBC yet?  Don't people realize credit default swaps were partly responsible for the financial collapse and the billions of dollars made by hedge fund managers/Goldman Sachs?  Go to wikipedia for the whole explanation on Credit default swaps.  They are essentially insurance contracts that speculators or hedgers can use to protect from losses on bond defaults.  Hedge fund manager John Paulson (post + congress testimony video) made money in 2007-2008 by shorting sub-prime mortgages via CDS indexes.  It was an amazing trade, and that is why Greg Zuckerman of WSJ wrote a book on it called "The Greatest Trade Ever".

I'm sure shady stuff went down in this closed off institutional market, especially when the trade got crowded and more expensive.  Hedge fund managers are now saying they should be banned, based on systemic risks and underlying anti-social behavior (incentive to see companies fail).  Here are David Einhorn and *George Soros's thoughts on credit default swaps (*+ Ken Griffin on the new exchange).  Soros at a conference in Beijing:"Some bond holders own CDS and stood to gain more in bankruptcy than reorganization.  It's like buying life insurance on someone else's life and owning a license to kill him" (Video).

Since Dvol believes credit default swaps still serve a purpose, I believe that credit default swaps, CDS data (indices) and more importantly signals should be transparent and available to the retail investor, retiree, small business owner, garbage man etc.  Zero Hedge recently had a long post about the CDS market:

"The best outcome for all involved is not seeking a ban of all CDS transactions (well, maybe it is, although it is as impractical and, well, futile, as crusades get) but an exponential increase in transparency of everything related to the product. Even with all the recent so-called opacity removing measures, we challenge Barney Frank to show us one free, open, and public venue where we can find what the bid-ask spread on Goldman Sachs CDS (1 through 10 year) is at any one moment during the day (a 15 minute delay work just as well).It simply does not exist......" (Read the whole article)

Lets look at historical CDS data using ABX.HE.  The Markit ABX.HE index is a "synthetic tradeable index referencing a basket of 20 subprime mortgage-backed securities" (Markit).  "Market participants' expectations regarding future writedowns of tranche principal are key factors in determining ABX prices" (BIS.org).  First look at charts of CDS that referenced mortgage backed securities underwritten in the first half (06-02) and second half (07-01) of 2006 via ABX.HE.AAA/A 06-02, ABX.HE.BBB- 06-02 and ABX.HE.AAA/AA/A 07-01 from the blog theroxylandr.  That blog was SPOT ON...  You can see that prices fell/spreads widened on CDS insuring sub-prime MBS in November 2006 on the ABX.HE.BBB- 06-02 series.  The 07-01 series started to decline in February 2007.  When sub-prime delinquencies started to pick up in February 2007 and two Bear Stearns structured credit funds went bust in June 2007, I think that was the ultimate catalyst for the massive re-pricing of risk.   This was when John Paulson banked massive coin on his ABX trade.  Remember, all of this occured well before the market peaked in October 2007 so you can clearly see that "smart money" was in CDS

I found a few CDS charts saved on my computer that I think you should see (courtesy of Markit.com). Charts below are the ABX Indices (subprime mortgage backed securities index via credit default swaps) ABX.HE.AAA 07-02, ABX.HE.AA 07-02, ABX.HE.A 07-2, ABX.HE.BBB 07-02 and ABX.HE.BBB/BBB- 07-02 from July 2007 to January 2008.  They reference H1-07 originations.   All values were cut in half in a month, except AAA. *I'm not a professional CDS trader so correct me if I'm wrong..

So it's about time retail investors can hedge the POS banks originate! At least when the next big collapse comes around (in 2098).  By the way remember ABX.HE.BBB- 07-02 was quoting 17.5 in January 2008?  Look at activity this month on that series.  The price spiked 22% from 3.1 to 3.8!  Boo Yaaah ski daddy.

[courtesy of Markit]

Credit Derivatives Research is also a great place for CDS indices and information. I charted out some of their credit indices when spreads were about to breakdown. So when will a CDS retail product come out? Btw, check out the CDS heatmaps at Zerohedge.com.
Recommended posts powered by Google