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Archive for the ‘Credit-default swaps’ Category

Credit default swaps and treason in Greece

The revelations of Credit default swaps and treason in
Greece should start to flash red lights here in Ireland as there are enormous
movement in Irish credit default swaps spreads. With well placed insiders are
able to make huge money and nobody is calling for a public enquire, these financial
instruments of mass destruction are been used and nobody knows who’s benefiting
from them!

Are we not going down the obvious road to default because of
a conflict of interest by those that are charged with this decision??? How do
we know that special interests are not been looked after???

Can we thrust our politicians? I know what my answer is !

AIB has already defaulted see here

The International Swaps and Derivatives Association (ISDA) yesterday said that   a “credit event” had occurred on Allied debt, meaning the bank has   effectively defaulted on its debt, a situation the Irish government has gone   to extreme lengths to avoid.

Credit default swaps (CDS) sold on Allied subordinated bonds and, crucially,   its senior debt, have been activated by the decision of the ISDA   determinations committee that decides whether a borrower has defaulted.

The decision by the committee, which is made up of 10 major banks, follows the   announcement earlier this month by the Irish High Court of a “subordinated   liabilities order” that changed the terms under which junior debt in   Allied was originally sold, forcing holders of the bonds to accept an   extension in the maturity of the debt to 2035.

Allied had already missed a coupon payment on its Lower Tier 2 debt. However,   changes in the law enabled the bank to avoid being forced to be formally   placed in default.

For the market, ISDA’s decision renders this move largely irrelevant as it   means the bank will be categorised as in default in the eyes of investors.(source http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8590428/Allied-   Irish-Bank-has-defaulted-says-derivatives-body.html  )

Understanding Credit default swaps

In the first video clip toward the end you heard we the taxpayers were taking over approximately 14,000,000,000:00 Billion worth of Derivatives or (CDS) from Anglo Irish Bank  alone!

(I personally believe that that figure to be near the 100,000,000:00 mark)

But most people do not know or understand what exactly these Derivatives are let alone understand them .So in the 2nd video clip you can get a crash course on the basics of CDS.

But the bottom line is Brian Cowen and Brian Lenihan could not possible know what they needed to know before taking on such obligations and there lies’ the crocks of the Irish financial meltdown.

Politicans, experts at waffling are making decision on complex financial instruments, that I have being studying for the last 12 years and still do not fully understand, but I know that they are like financial nuclear bombs and are best Instruments that should be avoided at all costs. They are unregulated and you are buying a pig and a poke.

Here is what Warren Buffet had to say about these unregulated financial tools .

In fielding a question about derivatives, which he once referred to as “financial weapons of mass destruction,” Mr. Buffett told shareholders that he expects derivatives and borrowing, or leverage, would inevitably end in huge losses for many financial participants.

“The introduction of derivatives has totally made any regulation of margin requirements a joke,” said Mr. Buffett, referring to the U.S. government’s rules limiting the amount of borrowed money an investor can apply to each trade. “I believe we may not know where exactly the danger begins and at what point it becomes a super danger. We don’t know when it will end precisely, but…at some point some very unpleasant things will happen in markets.”

Mr. Buffett has expressed similar bearish sentiments about derivatives in previous meetings and in his widely read annual letters to shareholders. He had first-hand experience with the difficulties of derivatives after Berkshire acquired General Re, the reinsurance company, in the late 1990s, and spent several years unwinding its derivatives portfolio at a loss to reduce the subsidiary’s exposure to risk. He noted, however, that Berkshire currently has several dozen derivatives positions — such as futures and options contracts on stock indexes and foreign currencies — and added that “derivatives aren’t evil.”

Charlie Munger, Berkshire’s 83-year-old vice-chairman and Mr. Buffett’s droll sidekick during the six-hour annual meeting, said that the accounting of derivatives contributed to the risks they pose to the financial markets.

“The accounting being deficient enormously contributes to the risk,” said Munger, lamenting that executives and shareholders were getting paid on “profits that don’t exist.”

Mr. Buffett noted that existing accounting conventions allow parties involved in derivative transactions to value the same contract differently, leading to an inadequate or incomplete picture of the contract’s risk. “I will guarantee you, if you add up the marks on both side, they don’t add up to zero,” Mr. Buffett said, referring to the accounting of a single derivative contract.

Exacerbating the problem of derivatives and leverage is the short-term trading mentality and high turnover in the stock and bond markets, Mr. Buffett and Mr. Munger added. “There is an electronic herd of people around the world managing an amazing amount of money” who make decisions based on minute-by-minute stimuli, said Mr. Buffett, adding, “I think it’s a fool’s game.”

Source http://seekingalpha.com/article/34606-buffett-on-derivatives-a-fool-s-game

So what has Cowen and Lenihan gotten us into ?

Anglo Irish Credit Default Swaps ( So they do exist?)

Anglo Irish Bank Corp.’s offer to swap subordinated bonds for new notes may trigger payouts on as much as $420 million of credit-default swap contracts, according to BNP Paribas SA.

Anglo Irish offered investors a choice of trading 1.6 billion euros ($2.2 billion) of notes at 20 cents on the euro last week, or redeeming them for 1 cent per 1,000-euro face amount. Investors will have to approve changes to the terms of the bonds to exchange them, causing a so-called restructuring credit event on swaps linked to all of the bank’s debt, said BNP Paribas credit analyst Olivia Frieser.

The proposals come after Finance Minister Brian Lenihan vowed to “address the issue” of junior bondholders taking a loss on their investments in nationalized banks. The offer is “tantamount to a default,” and will lead to a downgrade of Anglo Irish’s non-senior ratings to D for “Default” after the switch, Toronto-based ratings firm DBRS said today.

“Most people will feel compelled to exchange,” London- based Frieser said. The Irish government is “facing enormous political pressure not to treat bondholders too well.”

Credit-default swaps insuring 10 million euros of Anglo Irish’s junior debt for five years cost 7 million euros in advance and 500,000 euros annually, BNP Paribas prices show. Contracts on the bank’s senior debt cost 1.35 million euros in advance and 500,000 euros annually.

Martha Kavanagh, an outside spokeswoman for the bank, declined to comment.

Bank Nationalized

Anglo Irish was nationalized in January after borrowing from mostly international investors and lending to property developers who couldn’t repay loans when the property market crashed. Commercial real estate prices in Ireland have fallen about 60 percent since peaking in 2007.

The first opportunity to trigger the swaps is Nov. 23, when holders of floating-rate lower Tier 2 notes due 2017 will vote on the debt exchange. The securities are trading at about 20.6 cents on the euro, according to data compiled by Bloomberg.

The decision on whether buyers of default protection can demand payment on Anglo Irish debt will be made by a committee of dealers and investors as members of the International Swaps & Derivatives Association. Auctions may then be held to determine the value of the debt and how much should be paid out.

A total 674 contracts protecting a net $420 million of Anglo Irish’s senior and subordinated debt were outstanding on Oct. 15, according to the Depository Trust & Clearing Corp., which runs a central registry for the market. Under the terms of the contracts, holders of swaps linked to both senior and subordinated debt can demand payment.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

  Comment :

see my posting on derivatives here

I have been warning about these obscure financial derivatives now for a long time and the chicken are now comming home to roost now!

http://thepressnet.com/2010/10/13/18-months-later/

http://thepressnet.com/2010/10/21/welcome-to-the-crises-of-credit/

http://thepressnet.com/2010/07/13/nama-and-its-derivative-trading/

http://thepressnet.com/2010/04/11/credit-default-swaps-threaten-the-system/

http://thepressnet.com/2010/03/31/the-anglo-derivatives-scam/

also place the word “derivatives” in the blogs search box for earlier postings on derivatives

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