Tuesday, May 20, 2008

Interesting Insight into Bear Stearns and the CDS market

So Bloomberg had a really interesting background piece that related the Bear Stears bailout to the CDS market in Bear's debt. Check out the article here.

The article has some interesting revelations from people privy to the CDS space, but the basic takeaways are that the thought of counterparties having to pay Bear CDS holders if the company went belly-up was of paramount concern to the Fed (and may have been the reason for the JPM (with the Fed's blessing) bailout). The ripple effect could have been huge and many other financial institutions likely could have seen their own liquidity issues result in a bankruptcy. Other insights: pricing transparency is horrible in the CDS space, the banks often hedge their CDS exposure and enjoy having the dealer status where they can be the gatekeeper to all of the CDS paper while minimizing their own risk, while hard the measure, the CDS market is actually predicted to be bigger than the NYSE.

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