U.S. Banks Sell More Insurance on Europe Debt

[dcollon]

http://www.bloomberg.com/news/2011-11-01/selling-more-insurance-on-shaky-european-debt-raises-risk-for-u-s-banks.html

[Grenville]

I've only looked at WFC derivative disclosure in their financials:

I haven't seen specific disclosure regarding country exposure on sold CDS or what type of CDS they are selling at WFC. They buy identical contracts from others to "transfer" their CDS risk.

 

The article will play to the current fear because banks don't have a ton of disclosure on the CDS contracts with respect to lines of business or counter parties similar to what insurance companies show in regards to reinsurance.

[dcollon]

I'm still not sure how I feel about the whole CDS market, but the lack of transparency is certainly a negative in my view. 

[Grenville]

I agree with you completely.

 

It's hard to get comfortable with the CDS exposure and I sometimes wonder why the banks put themselves in the middle of the chain if they are just going to buy an identical policy from someone else. Why not let their customers buy the contract directly from the derivative dealer, that way their balance sheet isn't at risk if a credit event happens or the credit dealer disappears.

 

One might argue these customers are too small to purchase CDS from a dealer. My rebuttal would be that I wish these contracts were written such that the banks just served as brokers, aggregating business for the dealers.

 

oh well....

[alertmeipp]

I agree with you completely.

 

It's hard to get comfortable with the CDS exposure and I sometimes wonder why the banks put themselves in the middle of the chain if they are just going to buy an identical policy from someone else. Why not let their customers buy the contract directly from the derivative dealer, that way their balance sheet isn't at risk if a credit event happens or the credit dealer disappears.

 

One might argue these customers are too small to purchase CDS from a dealer. My rebuttal would be that I wish these contracts were written such that the banks just served as brokers, aggregating business for the dealers.

 

oh well....

 

They should just call off this CDS thing. If u own bond, do ur homework. Greece debt got cut 50% and it's not default and thus CDS doesn't protect the creditors at the end.. why bother.

[dcollon]

alertmeipp, very good point.

[JSArbitrage]

I agree with you completely.

 

It's hard to get comfortable with the CDS exposure and I sometimes wonder why the banks put themselves in the middle of the chain if they are just going to buy an identical policy from someone else. Why not let their customers buy the contract directly from the derivative dealer, that way their balance sheet isn't at risk if a credit event happens or the credit dealer disappears.

 

One might argue these customers are too small to purchase CDS from a dealer. My rebuttal would be that I wish these contracts were written such that the banks just served as brokers, aggregating business for the dealers.

 

oh well....

 

They should just call off this CDS thing. If u own bond, do ur homework. Greece debt got cut 50% and it's not default and thus CDS doesn't protect the creditors at the end.. why bother.

 

I feel this way as well but think they should just ban naked CDS.  Either that or make them so standardized that they can be put in big, red bold font on 10-K's.  Everyone always talks about how governments and regulators are deathly afraid of a Greece default because no one really knows the ramifications for CDS.

 

Only in finance would people support the proliferation of weapons of mass destruction that can be hidden like this.

[ubuy2wron]

I agree with you completely.

 

It's hard to get comfortable with the CDS exposure and I sometimes wonder why the banks put themselves in the middle of the chain if they are just going to buy an identical policy from someone else. Why not let their customers buy the contract directly from the derivative dealer, that way their balance sheet isn't at risk if a credit event happens or the credit dealer disappears.

 

One might argue these customers are too small to purchase CDS from a dealer. My rebuttal would be that I wish these contracts were written such that the banks just served as brokers, aggregating business for the dealers.

 

oh well....

 

They should just call off this CDS thing. If u own bond, do ur homework. Greece debt got cut 50% and it's not default and thus CDS doesn't protect the creditors at the end.. why bother.

the ability of Greece to borr

I feel this way as well but think they should just ban naked CDS.  Either that or make them so standardized that they can be put in big, red bold font on 10-K's.  Everyone always talks about how governments and regulators are deathly afraid of a Greece default because no one really knows the ramifications for CDS.

 

Only in finance would people support the proliferation of weapons of mass destruction that can be hidden like this.

I am all for the banning of CDS. Banks love them they are highly profitable until they are not as the mkts are opaque and speads are large and the competion is slight. Plus the mkt is pretty much unregulated when did any one ever get charged with insider trading thru the CDS mkt. I believe that the real estate bubble in the US would have had a much smaller impact without the CDS mkt as sub-prime borrowers would have been unable to borrow. I suspect that  the ability of Greece to borrow so much with such a spotty credit history is likely due to the availability of CDS.

[ERICOPOLY]

I believe that the real estate bubble in the US would have had a much smaller impact without the CDS mkt as sub-prime borrowers would have been unable to borrow. I suspect that  the ability of Greece to borrow so much with such a spotty credit history is likely due to the availability of CDS.

 

I was wondering the same thing about muni insurance.  Did lowering the interest rate on munis via the regulated bond insurers contribute to the municipal over-indebtedness?  For that matter, did lowering the tax rate take it a step further?