When credit default swap sellers move to quoting upfront prices, the writing may be on the wall. Today's graffiti victim? Citi.
Sellers of credit protection in the credit default swaps market were asking to be paid on an upfront basis to insure Citigroup's subordinated debt on Tuesday, traders said, a sign of greater perceived risks at the third-largest U.S. bank.Five-year credit default swaps on Citigroup's subordinated debt were quoted around 9.5 percent upfront, or $950,000 in upfront costs to protect $10 million of debt, plus annual payments of $500,000 a year, according to a trader.
There are so many things to watch during this slow-motion train wreck that it is hard not to miss something. We're running out of popcorn here, people.
Citigroup sub CDS moves to upfront basis - traders [Reuters] via Alea
Posted by guest , Feb 24, 2009 12:01PM
How does this pricing work? Is it on nominal or market value?
Simplistically it would seem like this is valuing it at 90c. I think this is way too high.
Posted by guest , Feb 24, 2009 12:07PM
I don't understand why the CDS are priced so low. Jeez, if the Titanic was sinking would you sell "Vessel Submersion Swaps" (VSS) for anything less that one to one?
Posted by guest , Feb 24, 2009 12:10PM
Same LEH paper got like 8-12c.
I guess you need to understand who is selling. Buying C CDS from BAC probably not a great idea.
Posted by redpandot , Feb 24, 2009 12:18PM
@3 yeah, probably.
Posted by guest , Feb 24, 2009 12:24PM
i love the emergence of fail as an adjective.
Posted by guest , Feb 24, 2009 12:48PM
When a CDS moves from an on the run to an upfront price it is normally indicative of a company under distress.
@ 2 who thinks that the price is too low, please remember that if the government takes (partial) ownership of Citi it would not constitute a 'credit event' that would kick off the CDS contract. It is likely that if there were not rumors of nationalisation that the CDS would be trading at even higher levels than we currently see.
By the by, the 5yr CDS referencing US sovereign debt is now at an all time high of 100bps.
Posted by guest , Feb 24, 2009 12:54PM
@4
Do you have anything to add as value ("Value Add") or is your sole value-add a sarcastic repeat of my sarcastic "probably".
At least add a data point. Then you are a useful individual.
Better yet...go research BAC's balance sheet and come back with a suggestion as to what to do.
Posted by guest , Feb 24, 2009 1:01PM
@5
I assume you mean noun, and not adjective?
Actually it has long been in use as a count noun: "how did the class do? seven passes and two fails".
Use of fail as a _mass noun_ is a current internet meme.
Posted by guest , Feb 24, 2009 1:11PM
@7 What's a "data point?"
Posted by redpandot , Feb 24, 2009 2:16PM
@7 actually I was agreeing with the idea that there is actual value in knowing who's selling is actually important when thinking about price. Needn't be quite so defensive there chum.
Posted by redpandot , Feb 24, 2009 2:18PM
@7 actually I was agreeing with the idea that there is actual value in knowing who's selling - that this is actually important when thinking about price. Needn't be quite so defensive there chum.
-some clarification...words lost, argh.
Posted by guest , Feb 24, 2009 5:13PM
@10
My bad...i just thought you missed the point and were trying to harass me.
I was conceptually trying to figure out how the price made sense and then realized it just iterates back on the seller's credit.
Weird instrument that I'm not sure has a lot of purpose being sold. Almost like we let insurers sell (instead of buy) banking products and thus only amounts to a regulatory capital arbitrage product rather than something useful.