And just to emphasize why you want to avoid systemic effects from bank problems…
January 19th, 2009By David Goldman
Once you start nationalizing banks and admitting that your central bank might be swamped by the size of bad asset problems, bad things happen that you want to avoid. For example: 5-year credit protection on the United Kingdom traded today at LIBOR +125 basis points. That is where Brazil was trading in mid-August, just before things got out of hand. Here’s a better one: five-year credit protection on The United States of America traded today at LIBOR +69 basis points. That is wider than Brazil was trading in May 2007, before the crisis began. The credit quality of the US is now where Brazil — Brazil! — traded prior to the crisis. Given that the Fed is all in, with $1.4 trillion of dubious junk on its balance sheet, this should surprise no-one.
That is why I don’t expect any rush to nationalization. The authorities are going to tread softly around this minefield now that they are joined at the hip to the big banks.
January 20th, 2009 at 1:24 am
Hello David, would you be willing to buy protection on the US and/or any other country at this time? I wonder how far f.i. US spread might blow out if demand for treasuries is not sufficient to absorb increasing supply (I mean this year). I would think that the fall of global liquidity makes this scenario more and more likely. Technically I would not know with whom I would want to do a CDS given that counterpart issue is still unsolved so far. Guenter http://www.highyieldblog.com
January 20th, 2009 at 8:02 am
Gleitold,
I would look for divergence trades — sell protection on the US, buy protection on the UK, for example, or even better, southern Europe. Spain was trading recently in the low 100’s with Italy around +175. Long US risk vs short Spanish risk seems attractive. But I have not fully vetted these trades, and I am speaking hypothetically.
April 12th, 2009 at 7:34 pm
[...] Some of the best performers in world markets during the past month were the CDX of the largest industrial nations. That’s right: the collapse in the price of insuring against default on the likes of the United Kingdom was one of the most dramatic market moves. The fate of the banks and the credit of industrial nations are joined at the hip, as I’ve been warning since January. [...]
April 20th, 2009 at 7:13 am
[...] on the Fed’s balance sheet. The Fed was all in. The credit of the US government was at risk, as I wrote Jan. 19: Once you start nationalizing banks and admitting that your central bank might be swamped by the [...]