CDS on Australian Banks - RMBS - Anyone know how to find this?

[claphands22]

Anyone know how to find what the current CDS rates on Australian banks are going for? Especially, Westpac & Commonwealth? I also would like to dig into some of the RMBS that have been coming out of westpac/commonwealth/aussie home loans, yet I don't know how to go about find the prospectus.

 

Any help would be appreciated.

[benhacker]

If you don't get a response here, I would ping John Hempton at Bronte Capital and see if he can point you in the right direction.

 

John has some history with this board and Fairfax that is less than popular, but for any faults there he does actually know how to do due diligence, and for your angle, he resides in Australia and specializes in Financial companies.

 

My 2 cents.... let us know what you find.  For the record I think the Australian economy is headed for a rough patch, but bank debt will be backstopped if anything goes a wry, so I would probably choose AU government debt CDS if anything since they will be the same in the future, and gov CDS will be cheaper today (I assume).

 

Ben

[claphands22]

Thanks Ben. I'll see if I can get a hold of John Hempton.

 

Also, if anyone here has a strong point of view on Westpac/Commonwealth/Aussie Home Loans - I'd love to have a discussion with you. If you don't feel like responding via the thread please send me an e-mail at wallis(dot)joshua[at]gmail(dot)com

[spin]

Westpac-

http://www.westpac.com.au/about-westpac/investor-centre/funding-securitisation/outstanding-issuance-summary/

 

Commonwealth-

http://www.commbank.com.au/about-us/securitisation/mortgage-backed-securities/default.aspx

 

CDS

http://www.markit.com/cds/most_liquid/markit_liquid.shtml

 

Spin

[claphands22]

Westpac-

http://www.westpac.com.au/about-westpac/investor-centre/funding-securitisation/outstanding-issuance-summary/

 

Commonwealth-

http://www.commbank.com.au/about-us/securitisation/mortgage-backed-securities/default.aspx

 

CDS

http://www.markit.com/cds/most_liquid/markit_liquid.shtml

 

Spin

 

Excellent Spin!

 

Just eyeballing some of the CDS prices it seems the Australian banks CDS are already selling for a premium.  I am going to try to dig into the MBS today and see what I can find. I wonder where to find the CDS pricing for individual CDOs.

 

 

[claphands22]

If you don't get a response here, I would ping John Hempton at Bronte Capital and see if he can point you in the right direction.

 

 

We had short e-mail conversation.  He said with a Bloomberg it's easy to find the CDS prices; he hasn't seen any cracks in residential but he is watching Kellyville which he calls ground zero. I asked him why, and he said Kellyville = inland empire.

 

Wish I had access to a Bloomberg.

[spin]

"Just eyeballing some of the CDS prices it seems the Australian banks CDS are already selling for a premium."

 

JPMorgan Chase & Co    66  Spread (bps)

Wells Fargo & Co          86 Spread (bps)

Berkshire Hathaway Inc  98 Spread (bps)

Goldman Sachs Gp Inc  105 Spread (bps)

 

Westpac Bkg Corp                103 Spread (bps)

Aust & New Zld Bkg Gp Ltd    102 Spread (bps)

Natl Aust Bk Ltd                  102 Spread (bps)

 

You'll need to go to the dealer desk to get CDS quotes on specific RMBS tranches if offered.

 

These comments may interest:

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=2998.15

 

Australian banks will suffer in any Asian induced downturn but capital likely won't implode like in US.  You can make an argument that the bank most vulnerable to a downturn is National Australia Bank as it has the highest C&I exposure and lowest residential exposure.

 

Spin

[claphands22]

"Just eyeballing some of the CDS prices it seems the Australian banks CDS are already selling for a premium."

 

JPMorgan Chase & Co     66   Spread (bps)

Wells Fargo & Co           86 Spread (bps)

Berkshire Hathaway Inc  98 Spread (bps)

Goldman Sachs Gp Inc  105 Spread (bps)

 

Westpac Bkg Corp                103 Spread (bps)

Aust & New Zld Bkg Gp Ltd    102 Spread (bps)

Natl Aust Bk Ltd                   102 Spread (bps)

 

You'll need to go to the dealer desk to get CDS quotes on specific RMBS tranches if offered.

 

These comments may interest:

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=2998.15

 

Australian banks will suffer in any Asian induced downturn but capital likely won't implode like in US.  You can make an argument that the bank most vulnerable to a downturn is National Australia Bank as it has the highest C&I exposure and lowest residential exposure.

 

Spin

 

Yes, I was wrong. They are selling for a slightly higher, if not negligible premium.

 

Interesting point about National Australia & and about how australian loans are full recourse. I'd imagine there will be much less defaulters in Australia if there is a crash because it's full recourse.

 

Have you purchased any CDS so far? I'm currently thinking about how to go about buying a CDS position but I am not sure how to go about it.

 

 

[ERICOPOLY]

 

Interesting point about National Australia & and about how australian loans are full recourse. I'd imagine there will be much less defaulters in Australia if there is a crash because it's full recourse.

 

 

It will look like Florida then perhaps.  First mortgages in Florida are full recourse.  

 

I'm in Australia right now so I get a front row view of the spectacle of denial.  And yes, that's one of the arguments here.

 

Additionally, HELOC loans in the US in all states are full recourse.  This of course means that people are prudent with them right?

 

 

[ERICOPOLY]

Furthermore, this article states that Florida is among the three states with the highest defaulters:

 

http://www.realestatechannel.com/us-markets/residential-real-estate-1/real-estate-news-federal-national-mortgage-association-fannie-mae-freddie-mac-terence-edwards-bank-foreclosures-strategic-mortgage-defaults-delinquent-home-loans-2800.php

 

Here is the list of non-recourse states:

 

http://wiki.answers.com/Q/Which_states_are_non-recourse_states_for_mortgage_debt

[claphands22]

Ericopoly,

 

Interesting, didn't know Florida had full recourse loans as well. Yes, the recourse structure on loans doesn't prohibit someone from doing something stupid - but it is more likely they would continue paying the mortgage even if the value of the home is greater than the mortgage price. 

 

 

[ERICOPOLY]

Ericopoly,

 

Interesting, didn't know Florida had full recourse loans as well. Yes, the recourse structure on loans doesn't prohibit someone from doing something stupid - but it is more likely they would continue paying the mortgage even if the value of the home is greater than the mortgage price.  

 

 

 

I'll agree that it is "more" likely, however, when a rental home is down 50% in value the only thing stopping people from walking away is debtor's prison.  12% of households in Australia report rental income on their tax filings, and 70% of them are negative cash flow.  Those are the people with the incentive to walk away.   People don't walk away after a 5% drop... but I don't think Australia is headed for a 5% drop.

 

Annual rents in Australia (before expenses like repairs and mortgage interest) average 3.5% of the home price.  In 1989 it was 8%.  The other argument you'll hear in Australia is that the fundamentals (demand and scarcity) are driving housing prices...  well, it's interesting that it has not the same impact on rent, eh???

 

[claphands22]

 

 

I'll agree that it is "more" likely, however, when a rental home is down 50% in value the only thing stopping people from walking away is debtor's prison.  12% of households in Australia report rental income on their tax filings, and 70% of them are negative cash flow.  Those are the people with the incentive to walk away.   People don't walk away after a 5% drop... but I don't think Australia is headed for a 5% drop.

 

Annual rents in Australia (before expenses like repairs and mortgage interest) average 3.5% of the home price.  In 1989 it was 8%.  The other argument you'll hear in Australia is that the fundamentals (demand and scarcity) are driving housing prices...  well, it's interesting that it has not the same impact on rent, eh???

 

 

Hey Eric, I'm definitely not arguing with you about the bubble. I think we are on the same page. Right now, I'm focused on what instrument I should use for this idea. The banks might be better capitalized than I originally thought, so they might not be best thing to short. CDS are interesting, but I think buying them would be a pain. From what I understand buying one requires a lot of capital and if I do decide to this is the best option, then I'll have to pool my capital with a few partners. Also, even though I believe the CDS will widen during a crisis - I'd rather have better fundamental analysis so I know when to sell the CDS. Also, CDS depend on a "credit event" - which, I'm not even sure what that means. So, there is lots of me to figure out and analyze before I even come close to making a decision.

 

I'd think Munger would suggest me to put this in the too complicated pile and move forward, but I find this idea extremely interesting.

[ERICOPOLY]

 

 

I'll agree that it is "more" likely, however, when a rental home is down 50% in value the only thing stopping people from walking away is debtor's prison.  12% of households in Australia report rental income on their tax filings, and 70% of them are negative cash flow.  Those are the people with the incentive to walk away.   People don't walk away after a 5% drop... but I don't think Australia is headed for a 5% drop.

 

Annual rents in Australia (before expenses like repairs and mortgage interest) average 3.5% of the home price.  In 1989 it was 8%.  The other argument you'll hear in Australia is that the fundamentals (demand and scarcity) are driving housing prices...  well, it's interesting that it has not the same impact on rent, eh???

 

 

Hey Eric, I'm definitely not arguing with you about the bubble. I think we are on the same page. Right now, I'm focused on what instrument I should use for this idea. The banks might be better capitalized than I originally thought, so they might not be best thing to short. CDS are interesting, but I think buying them would be a pain. From what I understand buying one requires a lot of capital and if I do decide to this is the best option, then I'll have to pool my capital with a few partners. Also, even though I believe the CDS will widen during a crisis - I'd rather have better fundamental analysis so I know when to sell the CDS. Also, CDS depend on a "credit event" - which, I'm not even sure what that means. So, there is lots of me to figure out and analyze before I even come close to making a decision.

 

I'd think Munger would suggest me to put this in the too complicated pile and move forward, but I find this idea extremely interesting.

 

You've been chatting with Yu about this -- I know, I've been talking with him as well about the CDS.  I don't believe the SEC allows us to purchase options on foreign exchanges, so the CDS is pretty much my only option.  And like you said, what a pain trying to get CDS.

 

[claphands22]

You've been chatting with Yu about this -- I know, I've been talking with him as well about the CDS.  I don't believe the SEC allows us to purchase options on foreign exchanges, so the CDS is pretty much my only option.  And like you said, what a pain trying to get CDS.

 

 

Yeah, I have been chatting with Yu. I am starting to think buying CDS on the banks is too speculative, although reasonably speculative. I've been investigating Westpac, and what I've noticed, with the help of spin, is that most of the loans have a very low LVR with an average LVR of 44%. The loans with LVR of 80% or above are insured. Although, I am worried about how they are insured; the loss of bank capital is probably less than what we think if Australia has a bubble pop.

 

pg 48 of the Investor Presentation explains the LVR dynamics.

http://www.westpac.com.au/docs/pdf/aw/ic/2010_FY10_IDP1.pdf

 

Are options on Australian stocks not available on Interactive Brokers? I didn't know SEC doesn't allow options on foreign exchanges.

 

Also, I called up DB in Singapore to investigate buying CDS.  They weren't interested in working with me since I'm not an institutional buyer. Also from what I understand, you'll need at least 5M to even buy these.

[Guest Dazel]

 

I like everyone's thinking.

 

Although I will pass on a story of the past....Jim Rogers successfully shorted the market in the early 70's by buying puts.. more than doubling his net worth...as he puts it (pardon the pun)...he was sure that a number of terrible companies would go bankrupt in the next year...there was a short squeeze and he was wiped out completely...the companies that he shorted through puts all went bankrupt in 1974...but he did not have the capital to survive.

"Irony" most of us here made a lot of money essentially shorting the market through The Fairfax "put" of CDS' and index shorts and Treasuries....Are we getting like Jim Rogers in the early 70's? a good question...and one I am asking myself...as I bought puts on Netflix last week!

 

just food for thought guys...no answers.

 

Dazel.

[Myth465]

I dont think it is guaranteed to be a hard landing and really only like CDS when the other entity goes bust. Other then that you are relying on the greater fool / panic to make you money. Aussies do inmo have a huge sense of denial though. Its interesting talking to one about housing.

 

So far this is in the too hard pile. I dont think its worth it unless you can find a home builder / property developer to short with options if possible.

[gokou3]

 

Are options on Australian stocks not available on Interactive Brokers? I didn't know SEC doesn't allow options on foreign exchanges.

 

Also, I called up DB in Singapore to investigate buying CDS.  They weren't interested in working with me since I'm not an institutional buyer. Also from what I understand, you'll need at least 5M to even buy these.

 

List of Australian stock options available on IB:

http://interactivebrokers.com/en/trading/exchanges.php?exch=asx&showcategories=OPTGRP&ib_entity=llc

[txlaw]

You've been chatting with Yu about this -- I know, I've been talking with him as well about the CDS. 

 

Whatever happened to dengyu the nugget?  I seem to recall enjoying reading his posts before I joined the board as a member.

[ERICOPOLY]

You've been chatting with Yu about this -- I know, I've been talking with him as well about the CDS. 

 

Whatever happened to dengyu the nugget?  I seem to recall enjoying reading his posts before I joined the board as a member.

 

He is one of the two people I pointed towards this board (the other being Santayana) -- but neither has posted in quite some time.

 

Nothing is wrong with his health.

[Guest Dazel]

 

Having said that the Netflix short has worked out very well!

 

Dazel.

[txlaw]

Nothing is wrong with his health.

 

Good to hear.  Too bad he doesn't post anymore.