Here's an an interesting article on that - also mentions the counter party risk ctindale is referring too.
ctindale I can't understand why ANZ would have to provision $11.6 billion if the monolines failed? Its already written down the value of the insurance.
Thomson Financial News GM, Ford, GE debt volumes exceed CDS exposures 11.05.08, 4:38 PM ET
By Karen Brettell
NEW YORK, Nov 5 (Reuters) - The amount of debt outstanding at General Motors Corp, Ford Motor Co, General Electric and others dwarfs the amount of credit default swap (CDS) risk on the companies, according to new data.
The data contrasts with fears that CDS volumes have surged to represent several times the amount of debt they insure, and that the high volumes raise the risk that protection sellers will be unable to make payments when borrowers default.
Credit default swaps are used to protect against the risk of a corporate, sovereign or other borrower defaulting on their debt, or to speculate on their credit quality.
Growth in the contracts has propelled gross volumes to $33.56 trillion globally, drawing ire and fear from regulators and observers concerned about the market's runaway growth.
New data however, shows that for most of the actively-traded companies, the real amount of CDS exposure is far below their debt.
The confusion arises from the oft-quoted gross numbers, which vastly overstate the actual amount of risk.
For example, $64.72 billion in gross CDS exposure, known as its notional volume, is outstanding on GM, according to data the Depository Trust & Clearing Corporation (DTCC) released for the first time on Tuesday. DTCC clears the majority of CDS trades and has agreed to release the data on a weekly basis to improve the transparency of the market.
The gross number may stoke concerns that investors on the wrong side of the trade could face massive losses if the automaker defaults.
However, after reducing trades that offset each other, for example where a dealer has both bought and sold protection in equal measure, the net exposure to GM is a much more manageable $4.06 billion, the DTCC data shows.
GM's net exposure is significantly lower than the $32.45 billion the company has in outstanding long-term debt.
'The net notionals are designed to represent the payment from protection sellers to protection buyers upon default, whereas the gross notionals can include duplicated and closed out trades,' said Brian Yelvington, analyst at research firm CreditSights.
'The economic wealth transfer is obviously going to be quite a bit bigger from the bonds than the net economic wealth transfer in the CDS.'
Ford's net CDS exposures are also lower than its long-term debt, at $4.59 billion and $25 billion respectively. Similarly net CDS exposures on GE's finance arm, General Electric Capital Corp, stand at $12.15 billion, compared to $321.91 billion in long-term debt.
'Getting those net numbers out there and making people realize that the net amount that's going to change hands is much, much smaller (than gross numbers) will assuage some fears,' Yelvington added.
COUNTERPARTY RISKS
One area where CDS volumes may exceed the amount of outstanding debt is on companies such as bond insurer MBIA Inc that are large CDS counterparties.
MBIA sells insurance on corporate, mortgage and other debt using CDS via its insurance arm.
Concerns about counterparty failures accelerated after the collapse of Lehman Brothers in September, causing a rash of protection buying on banks and insurers active in the market.
MBIA's net CDS exposures of $5.41 million may have been plumped up by its counterparties using the contracts as a hedge. The company has $2.42 billion in long-term debt.
'People have been hedging counterparty exposure,' said John Tierney, credit analyst at Deutsche Bank in New York. 'If they have a lot of exposure to one firm they have to lay off some of that risk and they will often do that by buying protection.'
Meanwhile, the degree to which CDS volumes change over time is still unknown, but is likely to become clearer as more data is released.
For example, CDSs on GM and Ford are trading at levels that essentially already price in a default, making protection prohibitively expensive. The risk of losing money from the contracts if the companies recover is also large.
'The risk at this point with autos is that we get some kind of government program that helps the company, and cost of protection falls significantly,' Tierney added. 'A lot of people who bought protection may have just taken money off the table.'
That may mean that CDS volumes on the automakers were much higher in previous months.
'As we go forward and get more familiar with the data we'll be able to see how the net exposures line up with the amount of debt out there,' Tierney said.
(Editing by James Dalgleish) Keywords: CREDIT SWAPS/
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