Gebruik CDS (credit default swaps) als wapen

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Een innovatieve manier om CDSs (credit default swaps) te gebruiken?

Kun je die 'Depositary Trust & Clearing Corp in New York' ook gebruiken om
die CDS-en tegen elkaar weg te schrappen en dan kijken wie er met zijn
billen bloot moet?

Groet / Cees

http://blogs.ft.com/maverecon/
Derivatives and attempted state capture in Kazakhstan
May 1, 2009 7:11pm  Maverecon: Willem Buiter

CDS in Kazakhstan

A fascinating contribution by Gillian Tett in today’s Financial Times on
the role of CDS in the default of the largest Kazakh bank, BTA, raises a
number of wider issues. Last week, BTA went into partial default when
Morgan Stanley and another bank demanded repayment of loans they had made
to BTA and BTA was unable to comply.  Tett also discovered that, just
after calling in its loan to BTA, Morgan Stanley asked the International
Swaps and Derivatives Association (ISDA) to start formal proceedings to
settle credit default swaps contracts written on BTA.  I don’t know the
aggregate value of the credit default swap contracts written on BTA that
Morgan Stanley owned, whether it was smaller or larger than the value of
the loans to BTA called by Morgan Stanley, or who the writer(s) of these
CDS contracts was or were.  But it raises concerns.

The reason it raises concerns can be made clear with the following
hypothetical example.  Assume some large western bank, let’s call it St.
Manley Organ Bank, has made a loan of size A to BTA or has bought its debt
in amount A.  As a creditor to  BTA, St. Manley Organ would normally want
to avoid a default by BTA, because St. Manley Organ is bound not to get
paid in full in the event of a default by BTA.  But now assume that St.
Manley Organ has also bought CDS in amount L to cover the risk of default
on BTA debt.  As long as A > L, St. Manley Organ has a net long position
in BTA debt, and it will get hurt financially if BTA defaults, even if the
writer of the CDS is creditworthy and pays up in full.  The purchase of
CDS therefore is the purchase of insurance: St. Manley Organ has an
insurable interest.

However, CDS can be bought in any amount without the purchaser having any
insurable interest in the underlying security.  If St. Manley Organ had
bought CDS contracts for a larger amount of BTA debt than  it owns, that
is, if A < L, then St. Manley Organ has a net short position in BTA debt,
provided the writer (seller or issuer) of the CDS is creditworthy.  It is
better off if BTA defaults than if it does not default.  It profits from a
BTA default.

If you own CDS written on BTA in an amount larger than the amount of BTA
debt you own, you are not insuring yourself against the risk of a default
by BTA and the resulting loss this would cause you.  Instead you don’t
have an insurable interest and you are placing a bet on a default by BTA.
You win your bet if and only if BTA defaults.  This would not matter
greatly if St. Manley Organ had no way to influence the likelihood of
default of BTA.  But if St. Manley Organ can influence the likelihood of
default of BTA there would be a nasty case of moral hazard.

Gillian reports that “Right now more than $700m BTA CDS contracts are
registered with the Depositary Trust & Clearing Corp in New York”.  The
two loans BTA defaulted on were worth $550 million .  This does not mean
that someone made a $200 million profit:  total outstanding borrowings of
BTA were around $13 billion, and it is quite possible that some or all of
the CDS in question were written on the $12.250 billion worth of BTA debt
that has not defaulted (yet).  But it does cause one to ponder.

[rest weggelaten]

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