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Kyle Bass Likely Made Nearly $10 Billion on Greek CDS Trigger


jacobwolinsky
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Several things don't make sense:

 

1) Bass has said he sold most (all?) of his Greek CDS

2) There is reported only $3B (notional) Greek CDS outstanding

3) The "650 times" numbers don't account for the carry and all in cost of CDS which substantially lowers the % return on effective cost... and also doesn't take into account that Bass's latest AUM numbers are already marked up for the substantial gains he has likely already made as of last year on any sovereign bets.

 

Would love to see the numbers, but sometimes trying to "break" news leads to erroring on being too extreme... this post made no sense me.  I'll gladly accept being proven wrong, but my guess is that this is off by 50x.

 

Ben

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It's only a matter of time before we know the answer to this question.

 

I look forward to it, and am glad ISDA did what is fair and right by acknowledging that a 'credit event' has indeed occurred via the technical default of Greece.

 

Many were worried that the markets were so not free that CDS holders would get screwed over.

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As per Bloomberg story - Net notional credit default swaps on Greek government bonds total $3.2 billion while the gross notional amount of CDS is more than $69 billion, according to Bloomberg data based on the DTCC.

 

I'm not an expert here but shouldn't you be focusing on the gross notional CDS exposure, not the net notional exposure?  The $3.2bn is the net notional exposure - the GROSS notional exposure is $69bn.  I'm not sure if there is $69bn gross notional long CDS exposure or $69bn gross notional of short CDS exposure outstanding. 

 

If there is $69bn of gross notional short CDS exposure, then there is long CDS notional exposure of $66bn.  Note that some of the long CDS exposure could be hedging long bond positions, so the actual unhedged short CDS exposure on Greece (excluding the long CDS used to hedge long bonds) is likely to be larger in that case.

 

If there is $69bn of gross long notional CDS exposure, then there is short $66bn of gross notional CDS exposure.  Some of this gross long notional CDS exposure could be due to actual hedging of long bond positions being held so the net notional exposure could actually be nil if you take the hedging of bond positions into account. (if more than $3.2bn notional CDS exposure is used for hedging long bond positions, then net notional unhedged exposure would actually be negative (i.e short))

 

Either way, those who are short CDS are likely to see additional cash collateral calls on the short CDS positions or cash settlement on their short CDS positions - I read somewhere in a Bloomberg article that CDS pricing was about 7mn per 10mn of exposure, (not sure how accurate this is since I don't get the updated market prices) so there is another 3mn of cash to pay up (which is another 42% [3mn on 7mn mark to market]).

 

Of course those that close out their short CDS positions by paying the additional 3mn per 10mn of exposure get delivery of the "defaulted" bond which they can in turn exchange for the newly issued Greek bond(s) (and other securities - I understand that there are warrants to be issued).  But they have to come up with the cash before they take delivery of the "defaulted" bond.  Where will they get the additional cash from? - their existing cash resources (if they have sufficient cash available), or by fund raising from selling some of their securities in their portfolios to raise cash (which could possibly cause some market dislocation).  They can then sell the newly issued Greek bond (securities) in the market when it is delivered and when it starts trading.  Who knows what the market value of the securities will be ...

 

If there is counterparty default anywhere along the chain, then if you netted off your short CDS exposure, by closing out in the market you could be caught on one side. 

 

Interesting to watch from the sidelines is all I can say ....

 

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This is complete hogwash, the entire market for Greek CDS was $3B with avg price paid nearly 7 million to protect 10 million of debt. Even if Kyle had bought every CDS in existence (which is an impossibility) the total profit on the trade could only be: 840,000,000

 

Someone told me it actually might be around $3billion

 

John Mauldin disagree w/ the net CDS #:

 

Secondly, the number that keeps showing up in the press is that there are only $3 billion of credit default swaps on Greek debt. That is only half true. The reality is that there is a NET $3.2 billion of CDS on Greek debt. The total or GROSS amount of swaps written is estimated to be about $60-70 billion (Dan Greenhaus, Chief Global Strategist, BTIG). This is in the 4,323 contracts that are known about.

Of the net exposure, the loss is likely to be less than the $3.2 billion, unless Greek debt goes to absolute zero. But that does not tell the whole story. For instance, just one Austrian state-owned "bad bank," KA Finanz, faces a hit of up to 1 billion euros ($1.31 billion) for the hole Greece's debt restructuring punches in its balance sheet. That loss, which will be borne by Austrian taxpayers, is someone else's gain. The net number means nothing to them – they lose it all, over a third of the expected total loss.

Every bank and hedge fund, insurance company, and pension fund has its own situation. Care to wager that the larger banks won't win on this trade? My bet is that there will be $30 billion in losses, out of which maybe someone will make $27 billion in gains.

 

 

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This is complete hogwash, the entire market for Greek CDS was $3B with avg price paid nearly 7 million to protect 10 million of debt. Even if Kyle had bought every CDS in existence (which is an impossibility) the total profit on the trade could only be: 840,000,000

 

 

Just a little question:  How do we have any idea how big the entire CDS market is when it is fundamentally an unorganized and unregulated market (OTC)?  You and I could enter into a CDS contract on Greek debt (but you should worry about be as a counter-party!), and nobody would ever know.

 

Have I missed the creation of some central registry of these types of contracts or something?

 

 

SJ

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This is complete hogwash, the entire market for Greek CDS was $3B with avg price paid nearly 7 million to protect 10 million of debt. Even if Kyle had bought every CDS in existence (which is an impossibility) the total profit on the trade could only be: 840,000,000

 

 

Just a little question:  How do we have any idea how big the entire CDS market is when it is fundamentally an unorganized and unregulated market (OTC)?  You and I could enter into a CDS contract on Greek debt (but you should worry about be as a counter-party!), and nobody would ever know.

 

Have I missed the creation of some central registry of these types of contracts or something?

 

 

SJ

 

I think the DTCC reports on 95%+ of the market.

 

http://www.dtcc.com/products/derivserv/index.php

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Appreciate the correction on the Gross vs. Net here.  I had thought what I had read was <$4B *gross*.

 

If $70B is the Gross figure, I could see Bass being larger there.

 

I also share skepticism of those who wonder about how accurate the Net numbers are, but after Lehman and Wamu went down, the cash trading hands in both situations was 4-7% of Gross as a data point which from what I recall was inline with the net #'s.

 

Interesting to see what Bass makes here if he really is still holding some of this.

 

Ben

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Appreciate the correction on the Gross vs. Net here.  I had thought what I had read was <$4B *gross*.

 

If $70B is the Gross figure, I could see Bass being larger there.

 

I also share skepticism of those who wonder about how accurate the Net numbers are, but after Lehman and Wamu went down, the cash trading hands in both situations was 4-7% of Gross as a data point which from what I recall was inline with the net #'s.

 

Interesting to see what Bass makes here if he really is still holding some of this.

 

Ben

 

No worries Ben. I think $10b now is prob unlikely I am trying to get more info to get a #. What denominations do CDSs come in? Bc if they come in $100k units of $1m, we would know he at least made $65,-$650m

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Appreciate the correction on the Gross vs. Net here.  I had thought what I had read was <$4B *gross*.

 

If $70B is the Gross figure, I could see Bass being larger there.

 

I also share skepticism of those who wonder about how accurate the Net numbers are, but after Lehman and Wamu went down, the cash trading hands in both situations was 4-7% of Gross as a data point which from what I recall was inline with the net #'s.

 

Interesting to see what Bass makes here if he really is still holding some of this.

 

Ben

 

No worries Ben. I think $10b now is prob unlikely I am trying to get more info to get a #. What denominations do CDSs come in? Bc if they come in $100k units of $1m, we would know he at least made $65,-$650m

 

No denominations.  They are individual contracts.  Theoretically they could be in any amount.

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Appreciate the correction on the Gross vs. Net here.  I had thought what I had read was <$4B *gross*.

 

If $70B is the Gross figure, I could see Bass being larger there.

 

I also share skepticism of those who wonder about how accurate the Net numbers are, but after Lehman and Wamu went down, the cash trading hands in both situations was 4-7% of Gross as a data point which from what I recall was inline with the net #'s.

 

Interesting to see what Bass makes here if he really is still holding some of this.

 

Ben

 

No worries Ben. I think $10b now is prob unlikely I am trying to get more info to get a #. What denominations do CDSs come in? Bc if they come in $100k units of $1m, we would know he at least made $65,-$650m

 

Why are you consistently shooting first and asking basic questions later? It's like you're trying to create a National Examiner or US Weekly of finance.

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Appreciate the correction on the Gross vs. Net here.  I had thought what I had read was <$4B *gross*.

 

If $70B is the Gross figure, I could see Bass being larger there.

 

I also share skepticism of those who wonder about how accurate the Net numbers are, but after Lehman and Wamu went down, the cash trading hands in both situations was 4-7% of Gross as a data point which from what I recall was inline with the net #'s.

 

Interesting to see what Bass makes here if he really is still holding some of this.

 

Ben

 

No worries Ben. I think $10b now is prob unlikely I am trying to get more info to get a #. What denominations do CDSs come in? Bc if they come in $100k units of $1m, we would know he at least made $65,-$650m

 

Why are you consistently shooting first and asking basic questions later? It's like you're trying to create a National Examiner or US Weekly of finance.

 

By the way Jacob, be careful in what you state in your story titles. 

 

A very good example is what the title in the NY Times article on Fairfax said:

 

Fairfax Financial's $400 Million Tax Break, Revisited

 

And what your title discussing the article said:

 

Prem Watsa And Fairfax May Owe $400 Million After Improper Tax Returns

 

The NY Times is saying that there MAY have been impropriety.  You are saying there WAS impropriety.  That little difference can be the difference between ignoring an article and being sued for an article.  As your readership increases, there is more and more such risk if you aren't careful.  Cheers! 

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John Mauldin disagree w/ the net CDS #:

 

Secondly, the number that keeps showing up in the press is that there are only $3 billion of credit default swaps on Greek debt. That is only half true. The reality is that there is a NET $3.2 billion of CDS on Greek debt. The total or GROSS amount of swaps written is estimated to be about $60-70 billion (Dan Greenhaus, Chief Global Strategist, BTIG). This is in the 4,323 contracts that are known about.

Of the net exposure, the loss is likely to be less than the $3.2 billion, unless Greek debt goes to absolute zero. But that does not tell the whole story. For instance, just one Austrian state-owned "bad bank," KA Finanz, faces a hit of up to 1 billion euros ($1.31 billion) for the hole Greece's debt restructuring punches in its balance sheet. That loss, which will be borne by Austrian taxpayers, is someone else's gain. The net number means nothing to them – they lose it all, over a third of the expected total loss.

 

This is probably something very basic, but could someone explain what exactly "Net $3.2B of CDS" means?  My understanding is all derivatives are zero-sum games, so if one side wrote $60-70B notional exposure of CDS, another side must have bought $60-70B of it.  Why is there a non-zero net amount?

 

 

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John Mauldin disagree w/ the net CDS #:

 

Secondly, the number that keeps showing up in the press is that there are only $3 billion of credit default swaps on Greek debt. That is only half true. The reality is that there is a NET $3.2 billion of CDS on Greek debt. The total or GROSS amount of swaps written is estimated to be about $60-70 billion (Dan Greenhaus, Chief Global Strategist, BTIG). This is in the 4,323 contracts that are known about.

Of the net exposure, the loss is likely to be less than the $3.2 billion, unless Greek debt goes to absolute zero. But that does not tell the whole story. For instance, just one Austrian state-owned "bad bank," KA Finanz, faces a hit of up to 1 billion euros ($1.31 billion) for the hole Greece's debt restructuring punches in its balance sheet. That loss, which will be borne by Austrian taxpayers, is someone else's gain. The net number means nothing to them – they lose it all, over a third of the expected total loss.

 

This is probably something very basic, but could someone explain what exactly "Net $3.2B of CDS" means?  My understanding is all derivatives are zero-sum games, so if one side wrote $60-70B notional exposure of CDS, another side must have bought $60-70B of it.  Why is there a non-zero net amount?

 

The net is how much will be paid out because of the default.  The buying/selling of CDS are asymmetric and have different outcomes (non-zero) depending on when/whether the default occurs.  So netting is the reconciliation of different CDS contracts. 

 

For example:

 

Bank A sells 50 billion of CDS to Bank B

Bank B sells 25 billion of CDS to Bank C

 

the net exposure is 25 for bank B and (I think) 50 billion overall, versus gross of 75.

 

 

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This is probably something very basic, but could someone explain what exactly "Net $3.2B of CDS" means?  My understanding is all derivatives are zero-sum games, so if one side wrote $60-70B notional exposure of CDS, another side must have bought $60-70B of it.  Why is there a non-zero net amount?

 

this explains it in a nutshell about as good as any:

 

http://ftalphaville.ft.com/blog/2011/10/27/713826/how-gross-and-net-cds-notionals-really-work/

 

 

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This is probably something very basic, but could someone explain what exactly "Net $3.2B of CDS" means?  My understanding is all derivatives are zero-sum games, so if one side wrote $60-70B notional exposure of CDS, another side must have bought $60-70B of it.  Why is there a non-zero net amount?

 

this explains it in a nutshell about as good as any:

 

http://ftalphaville.ft.com/blog/2011/10/27/713826/how-gross-and-net-cds-notionals-really-work/

 

Thanks, this makes sense.

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