beware anz has cds termites

If ANZ were a house the pest controller would warn you about signs of termites

To make it really simple

ANZ has a +40B corporate bond exposure

the bonds were built by taking multiple tranches of corporate junk debt and blending them togther

the purpose of the blending was to increase the credit rating of the debt

the thinking at the time was if your exposure to junk debt was distributed across lots and lots of that kind of debt the distribution would ensure that you were not exposed to a single default

this kind of blending caused the sub prime bond disaster, investment banks would take sub prime, alt a, jumbo and prime and blend them together to raise them to investment grade status then sell them to investors who want AA rated fixed income investments

this way the investment bank could sell these bonds to pension funds and conservative investors , the blending was staged with the collaboration of the ratings agencies to unlock these bonds so they could be upgraded and sold to folks who would not normally invest in this kind of debt

a good example of this is Lehman bros selling sub prime CDOs to the municipal councils around Australia, the councils are suing because they got conned , they were sold investment grade bonds that were not really investment grade

the same thing happened in the corporate debt market, ANZ boug $40B in blended corporate debt, 800 different companies were blended together, the blending raised the overall rating of the debt to investment grade.

this was further ensured by taking out CDS default insurance with counter parties like Ambac and MBIA who insured the blended bonds

ANZ felt that these were low risk, the risk was distributed and insured, they felt there was little risk of systemic meltdown.

ANZ now face a systemic melt down in the corporate debt market

they face the situation where all the risk management measures they took are falling apart in front of their eyes

i this kind of environment ANZ now face massive massive right downs

Mike Smith can no longer claim that the underlying debt it stable and undistressed

ANZ face a catastrophe, they face the simultaneous the failure of their CDS counterparties, together with the deterioration of the underlying corporate debt performance , together with a massive slow down in the Australian and New Zealand economy

this is why Rudd is worried about them and is backing them to retain profit

the banking tsunami beacons have gone off, a corporate debt default wave is heading toward ANZ, the same systemic issues that existed in the sub prime bond market structurally exist in the corporate debt market.

IMO ANZ face massive provisioning of +$5-10B in the next 6 months if the events above unfold

The termites are evident how much structural damage exists is yet to be discovered

Caveat Emptor