Fnm Fre debt CDS - Is John Mauldin out of his mind?

Discussion in 'Economics' started by Daal, Sep 3, 2008.

  1. Daal


    "Gretchen Morgenstern reported last week that there are - drum roll - $62 trillion (with a "T") in credit default swaps written against Fannie and Freddie debt, or somewhere near 12 times the actual debt. Even if you cut this in half - because technically, when a buyer and a seller enter into a single transaction they create twice the value of the transaction in credit derivatives - this is a huge sum, far out of proportion to the underlying assets. More on this later."

    I read the gretchen article and she did not say it was a $62T market for fnm fre debt but a $62T for CDS in general and we always hear that is the size of the CDS market, there is no way in hell the gse cds market is the whole market. what is john smoking here


  2. Yea it must be an inaccuracy. Furthermore, anyone in the CDS market here?? Where is the bulk of the CDS exposure? FNM & FRE corporate? or Agency debt (which I am not sure even if CDS trade on ... I assume so). If I had to guess, the bulk of CDS are on govt backed agency debt, not FNM and FRE corporate. And with bear stearns precedent, we all know that no one will let FNM/FRE agency debt collapse (so thus a CDS blowup on these issues is unlikely with exception to some possibility of a margin call due to market dynamics.)

    FNM and FRE corporate, if there are CDS, must have wild spreads here ... I wouldn't be surprised if they had 400bp+ premiums. And with that considered, I doubt there would be much potential for a blowup in FRE/FNM corporate CDS, since disaster has already happened (yes it has ... !) and leverage ratios are probably on the low side. The higher the risk spread on FNM/FRE gets, the less PRESENT potential there is for a CDS blowup on this issue.

    What would scare me is a move on GE debt from some arbitrary low risk spread (100bp? i don't trade corporate debt, so forgive me) to 500bp on an overnight basis ... Somewhere no one is expecting. Thats where all the CDS damage is likely to be done.

    I say that 'disaster has happened' because anyone levered on FNM and FRE short CDS positions from pre-crash era would have already unwound... Risk spreads should have blown up already and overlevered players forced out.