Thursday, March 5, 2009

Bloomberg On Negative Basis

Good article by Bloomberg catching up on the negative basis trade, and specifically on the dynamics basis holders exert on companies which are staring at the bankruptcy abyss. In a nutshell basis holders will do all they can to accelerate the filing of corporate issuers of bonds and CDS due to the asymmetric payoff they stand to gain on the CDS leg versus the bond leg.
"Defaults are one of several ways that basis holders can benefit, so it would not surprise me if names with high concentrations of basis holders encounter resistance in their efforts to restructure,” said Michael Anderson, a high-yield debt strategist at Barclays Capital in New York.
Bloomberg also brings up the point we have been pounding the table on, that CDS does not promote "bear raids" as Dick Fuld put it, but rather is a facilitator of expressing risk in distressed names:
“You’ve got more information from a side of the market that didn’t exist before,” said Brian Yelvington of CreditSights. “People point at CDS causing all of this volatility. To me, it’s always been there. People haven’t been able to place the bets they would have liked.”
Zero Hedge has written extensively on the topic of negative basis trade previously. For thoughts posted on the topic, please do a site query on the term. Sphere: Related Content
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Daniel said...

If creditors are indifferent to whether or not a company goes bankrupt we have a broken system.

nnjg said...

there's only 8 billion of F CDS out?

Anonymous said...

CDS undercut the bankruptcy code's policy of supporting viable debtors in attempts to restructure, even if creditors don't want them to. It makes it harder to get creditor support because they can profit from CDS positions instead of only by maximizing their claim from the debtor.

If CDS holders sabatoge plans for viable debtors to restructure, Congress will respond most harshly. Perhaps by voiding CDS or perhaps by ignoring any creditor in bk for voting purposes if they have a short CDS position on the same or similar debt. But there will be severe blowback.

Al said...

Interesting... though I doubt that there is enough of a mass of neg basis holders to sway the market given that most of the positions have been cleaned out at a massive loss. Instead it sounds like companies that made bad funding and business decisions over the last few years are looking for a scapegoat...
I cover the rest here:

Anonymous said...

Wall St will always find a perverse misuse for every instrument.