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Monday, February 7, 2011

Betting on the Blind Side | Business | Vanity Fair

Betting on the Blind Side | Business | Vanity Fair: "The idea hit him as he read a book about the evolution of the U.S. bond market and the creation, in the mid-1990s, at J. P. Morgan, of the first corporate credit-default swaps. He came to a passage explaining why banks felt they needed credit-default swaps at all. It wasn’t immediately obvious—after all, the best way to avoid the risk of General Electric’s defaulting on its debt was not to lend to General Electric in the first place. In the beginning, credit-default swaps had been a tool for hedging: some bank had loaned more than they wanted to to General Electric because G.E. had asked for it, and they feared alienating a long-standing client; another bank changed its mind about the wisdom of lending to G.E. at all. Very quickly, however, the new derivatives became tools for speculation: a lot of people wanted to make bets on the likelihood of G.E.’s defaulting. It struck Burry: Wall Street is bound to do the same thing with subprime-mortgage bonds, too. Given what was happening in the real-estate market—and given what subprime-mortgage lenders were doing—a lot of smart people eventually were going to want to make side bets on subprime-mortgage bonds. And the only way to do it would be to buy a credit-default swap."

FT Alphaville » Merrill’s missing Ireland note

FT Alphaville » Merrill’s missing Ireland note: "On March 13, 2008, six months before the Irish real-estate Ponzi scheme collapsed, Ingram published a report, in which he simply quoted verbatim what British market insiders had told him about various banks’ lending to commercial real estate. The Irish banks were making far riskier loans in Ireland than they were in Britain, but even in Britain, the report revealed, they were the nuttiest lenders around: in that category, Anglo Irish, Bank of Ireland, and A.I.B. came, in that order, first, second, and third.
For a few hours the Merrill Lynch report was the hottest read in the London financial markets, until Merrill Lynch retracted it. Merrill had been a lead underwriter of Anglo Irish’s bonds and the corporate broker to A.I.B.: they’d earned huge sums of money off the growth of Irish banking. Moments after Phil Ingram hit the Send button on his report, the Irish banks called their Merrill Lynch bankers and threatened to take their business elsewhere."

Friday, January 21, 2011

Inflation derivatives house of the year: Deutsche Bank - Fairfax in 2010

Inflation derivatives house of the year: Deutsche Bank -

One particular zero-coupon option trade has done much to spur client activity – and Deutsche Bank was one of the banks involved. During the first six months of 2010, Toronto-based insurer Fairfax Financial purchased deflation protection worth $21.539 billion in notional, paying $173.7 million in premium, according to the firm’s second-quarter financial statements. The 10-year zero-coupon 0% options were denominated in dollars, euros and sterling, and were executed by Deutsche Bank and Citi.
The other side of the trade was largely taken by California-based fixed-income manager Pimco, which reported it had sold more than $8 billion of 10-year zero-coupon 0% inflation floors in a filing dated August 27. The floors were sold in return for more than $70 million in premium, with Deutsche and Citi again involved as counterparties.
The transaction made perfect sense for both participants, says Daragh McDevitt, London-based global head of inflation-linked structuring at Deutsche Bank. For Fairfax, the 0% floors act as a hedge against deflation and the impact that would have on its equity portfolio. At the same time, Pimco was able to cash in on 0% inflation floors embedded in its sizable portfolio of Treasury inflation-protected securities (Tips).

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US Mortgage Metrics - 2010 and defaulting.....

mortgage-metrics-q3-2010 US Department of Teasury

Credit Default SWAPs 2008 portfolio of Fairfax maturing now

Fairfax - Scotia Institutional Investors Sept 2008