A little light shed on credit default swap market

Posted by: Ben Levisohn on November 4, 2008

Phew. Just when I was starting to get worried, new data suggests that the total value of credit default swaps outstanding is smaller — much smaller — than we’ve been told. It’s only $33.6 trillion, according to new information released by the the Depository Trust & Clearing Corporation on Nov. 4, in the first the first of what promises to be a weekly wave of information on the credit default swap market.

Until yesterday, the only available public information on credit default swaps — complex financial insturments that act like insurance on bonds or allow financial players to make bets on a company’s likelihood of default — was the total value of outstanding contracts, which was recently estimated at around $42 trillion. The DTCC’s numbers show that to be much smaller — around $33 trillion. It also, for the first time, broke down the numbers — now it’s possibl;e to see which companies and, perhaps surprisingly, countries have the most contracts outstanding on their debt.

I know this data is supposed to make us feel more comfortable with the market and yes, it’s great knowing that only $33.6 trillion in contracts are outstanding, less than originally estimated. But it was bad enough watching the cost of CDS on financial companies gyrate like an epileptic belly dancer. I’m not sure I feel better now that I know market players are placing enormous bets on the debt of countries like Turkey, Brazil and Russia, too.

Nor is the DTCC data a complete picture of the credit default swap market place, as Yves Smith from Naked Capitalism points out:

In the blind man and the elephant game, DTCC probably has a sense of what most of the elephant looks like. But I get bothered when casual readers might assume it has a comprehensive view (the Bloomberg article acknowledges that indirectly by saying, “a Depository Trust & Clearing Corp. report that gives the broadest data yet”). I’d feel much better if they admitted there were gaps and reassured us that they were less than X rather than remaining silent and letting the public assume they know more than they might really know.

Why does any of this matter? Defenders of credit default swaps say that the complex financial instruments cut back on risk rather than exacerbating it, and a little more information can reduce the chance that CDS will bring the financial system down. Others, however, claim the instruments magnify losses and could suck up any stimulus money pumped into the financial system.

On Nov. 11, the DTCC will release actual trade information, rather than outstanding volume. Until then, here are the top ten credit default swaps based on total dollar value outstanding, net dollar value outstanding and number of contracts.


Total Dollar Value
1. REPUBLIC OF TURKEY: $188.6 billion
2. REPUBLIC OF ITALY $148.6 billion
3. FEDERATIVE REPUBLIC OF BRAZIL $147.3 billion
4. RUSSIAN FEDERATION $110.0 billion
5. GMAC LLC $100.6 billion
6. MERRILL LYNCH & CO., INC. $94.6 billion
7. THE GOLDMAN SACHS GROUP, INC. $92.8 billion
8. MORGAN STANLEY $91.9 billion
9. GENERAL ELECTRIC CAPITAL CORPORATION $86.0 billion
10. COUNTRYWIDE HOME LOANS, INC. $84.6 billion

Total Net Dollar Value
1. REPUBLIC OF ITALY $22.6 billion
2. KINGDOM OF SPAIN $16.6 billion
3. DEUTSCHE BANK AKTIENGESELLSCHAFT $12.4 billion
4. FEDERATIVE REPUBLIC OF BRAZIL $12.3 billion
5. GENERAL ELECTRIC CAPITAL CORPORATION $12.2 billion
6. FEDERAL REPUBLIC OF GERMANY $11.4 billion
7. MORGAN STANLEY $8.4 billion
8. RUSSIAN FEDERATION $8.3 billion
9. HELLENIC REPUBLIC $8.2 billion
10. MERRILL LYNCH & CO., INC. $8.2 billion

Top Contracts
1. REPUBLIC OF TURKEY 14,093
2. GMAC LLC 13,602
3. COUNTRYWIDE HOME LOANS, INC. 11,919
4. FEDERATIVE REPUBLIC OF BRAZIL 11,664
5. MERRILL LYNCH & CO., INC. 9,931
6. MORGAN STANLEY 9,913
7. THE GOLDMAN SACHS GROUP, INC. 9,793
8. GENERAL MOTORS CORPORATION 9,683
9. GENERAL ELECTRIC CAPITAL CORPORATION 8,457
10. CIT GROUP INC. 8,180

Reader Comments

Rick

November 10, 2008 9:58 AM

Where is the complete picture? Who are the companies that have defaulted on their bonds already? Have they had their CDS auctions yet? What were the results? When are the deadlines for paying off the counterparties? How much will the counterparties be paid? How much money needs to be raised to pay off the counterparties? Will this money be raised by selling stock on the open market?

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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