Credit Default Swaps

Credit Default Swaps (CDS’s) are an over the counter (not bought or sold through an exchange) product which gives the buyer insurance in the case of a credit event (default) of the underlying (reference entity: often a bond). Effectively this brings together a long and short. The video below does a good job of explaining much of this, well worth watching.

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The ‘big bad bank run’ is very quiet

bank run as defined by Barron’s dictionary of banking terminology as follows: ‘A series of unexpected cash withdrawals caused by a sudden decline of depositor confidence or the fear that a bank will be closed by the chartering agency. Today the ‘silent run’ is much more prevalent than bank runs in the past where customers lined up in front of the tellers window and demanded their cash. Today depositors simply transfer interest rate sensitive funds – called ‘hot money’ to other institutions, also called ‘a run on the bank’.

Several things have been happening in Ireland that feed into this, firstly is that some banks are leaving the country, that partly helps to make the €40bn that left in December make sense (the figure for all of 2010 is about €110bn). Then there are confidence issues with downgrades and the like.

One of the most common personal finance questions I get is about deposits being safe in the bank here, and on sums below €100,000 I hand on heart …

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The solution for Section 23 Owners

Section 23 properties have had their tax treatment changed, in effect the buyer honoured their side of the contract from the outset and after the initiation of this the Government reneged on their side of it. This is contrary to the idea of fairness, the concept of contractual obligations, and it undermines the faith any taxpayer can have in the state.

The state recently cut many people with income tax and reductions in entitlements, but these were never contractual and people certainly didn’t leverage up to obtain them. Landlords may not be a group worthy of sympathy, but at the same time recent changes to taxation on rent (Case V income) mean the amount of financing expense the business can offset has dropped by 25% (mortgage interest you can offset has gone from 100% to 75%), this is contrary to the rules of accounting when you look at any other business.

The only solution is a reversal of this policy, and perhaps the only way to ensure this is to apply the idea of mutual …

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Let’s have some fun…. Bond Style

We have been shaken, and the markets are stirred. Why not have fun in our final days? When asked what I’d do if I was on a plane that was going to crash, my simple answer is ask somebody for a shag and drink champagne until it all goes bang, what a pity that during the bond market equivalent of this all we can do is shake in our boots, I say crack open the bubbly.

O.k. So we can’t afford to drink champagne, and with any flight/sex innuendo I’ll become the blog version of Prenderville so we’ll leave that alone too.

What could we do with our bond market to sort out this mess? The issue we currently have is that there is capital depreciation on our bonds leading to higher yields, when you hear that our yields hit 8% it doesn’t mean that we are paying more, it means people are selling at a loss and new buyers get a higher yield on the indexed mix of bonds (Read More

Bond Bubble Looming, where does it end?

We have been talking about this for a while (28/01/09, 11/03/09, 23/04/09), it was a popular topic on this blog in 2009 but well covered and for that reason we have not revisited it much, but the alignment of the stars warrants a look at the symptoms of the disease because now they are ever more present than before. At this point we can see a clearer path; which is still leading to a bond bust destination.

It has also becoming a mainstream topic, recently it showed up in an article titled ‘Currency, the weapon of choice in a world of lower demand‘.

If something can’t happen it won’t, and what can’t happen is a world in which we see century bonds (bonds with 100yr terms) becoming commonplace, they will probably be (as is the benefit with all hindsight) the poster-boy of the …

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Kenneth Rogoff on China

We have been talking about the idea that the Chinese ‘miracle’ could not last indefinitely, in this clip from Bloomberg, Harvard Economist Kenneth Rogoff (co-author of ‘This time it’s different’) talks about China having a real estate bubble in the making, the bursting of this bubble is not about ‘if’ but when… Watch this space! [If the clip doesn’t play for you then follow this link ]

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If you didn’t like 100% mortgages you’ll loathe negative equity mortgages

I was interested in the front page of today’s Independent in which Charlie Weston broke a really big story about Irish banks being in advanced stages of designing ‘Negative Equity Mortgages’ (this is vastly different than the Negative Equity Loan/Short Sale Loan we have discussed previously). Essentially the bank will allow an individual to carry negative equity out of one property and move that onto another one within certain parameters.

This practice has already existed in the UK and is offered by Nationwide, Coventry and RBS, the schemes have not proved to be very popular, in part because of the stringent underwriting required. It is one thing for a client to fall into negative equity but another to actually facilitate them in compounding that fact and taking a further bet on their ability to repay. What do I mean by that?

First Loan: €200,000 Value: €150,000 Neg/Eq: €50,000

Then the €50,000 shortfall is passed into a second loan of (for example) €200,000 …

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Irish Banking. How does it play out?

I used to be in a Chess Club, and one thing it taught me (apart from how to lose using the Kings Gambit) is that you can often see a general result long before you see it exactly, when you are a piece down and can’t control the centre of the board you know you are in trouble, but how and where the checkmate occurs is unknown, game theory can’t tell you precisely and reverse integration from the end game may not bring you to where you started from, but the player knows instinctively that they are up against the wall.

Sometimes appearances can be deceiving, you might think you are fine and you are not (2003-2009), other times you can get caught up about losing a pawn but you are in fact gaining ground (2010), albeit painfully and slowly.

I believe the same can often apply to markets. Today we will look at the reasons for why we believe the banks are going to survive and furthermore, what the results will be of their survival.

The core belief in …

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