Wednesday, March 4, 2009

Is AIG 1 Year CDS A Seller's Dream?

Reader Mike points out an interesting potential selling opportunity in AIG 1 Yr CDS, which is trading on one of the most inverted curves in CDS land. As a collapse of AIG would be equivalent to the blasphemous "credit event" of U.S. Sovereign CDS, having to pay for the settlement on 1 years in AIG seems like an oddly armageddonesque prospect. Yet unlike buying US CDS, an account selling AIG protection picks up nice solid carry assuming the world doesn't end, and if the worst happens and AIG folds, there will likely be nobody left to collect on the default and the seller can quietly tiptoe out off the trading floor into the nearest version of McFadzen's.



"We all know how dangerous it is these days to believe that the worst wont happen, and I understand all the issues around ratings-based collateral calls after the AIG mess. But with $36 bn in cash, $20 bn in marketable securities, $98 bn of access to the CPPF, $70 bn of access to the TGLP, $34 bn in tangible equity and a TCE ratio of 5.3% that any bank would die to have......why are people buying default protection for 1 yr at 15% (other than those told "hedge or be fired" on some correlation desk)? What is the catalyst for the implosion people are fearing here? Are people seeing AIG demons when maybe they shouldn't be?" Sphere: Related Content
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6 comments:

Anonymous said...

My wild guess is that the point probably hardly trades. If anyone's bid for it, its probably b/c they ripped the face off of someone who was told "hedge or be fired", and looking to cover. Otherwise, would guess traders on dealer desks are very cognizant that paying 15% notional on AIG is probably a silly, silly thing to do..."where's your bid on 1Y AIG" ... "market feeling a bit better here, i'm 1000/2000 right now..."

"Mindles H. Dreck" said...

Well, almost all the cash is held against matched notes, they have no TLGP or CPFF access at all, and they have no tangible capital after their $60 Billion write off, but other than that, I'm with you.

Actually I am. The access to the $30B of new govt. capital and the preferred should protect the senior pretty well. Odds are the govt takes the life co and this ends up a highly leveraged P&C insurer after they finish winding down the remaining less toxic CDO book.

Anonymous said...

" i'm 1000/2000 right now..." Is that bid good for size?
.........:-))

Anonymous said...

equities just moved higher, which means we're going tighter, so I'm going to have to re-rack that market...

Max Leverage said...

Ummm. I don't think, in a financial crisis where naked CDS's seem to be the primary culprit, the solution is to write more naked CDS's.

I have to agree with Denninger. Until CDS's are reined in, you can't afford to buy stocks because hedge fund managers can kill companies at will.

Anonymous said...

they wish they could, but really they can't...