cds counterparty risk the biggest threat

ANZ has the largest exposure of any Aust bank to CDS counterparty failure, 75% of global financial organizations see this as the number one threat to stability

http://www.hedgefundsreview.com/public/showPage.html?page=809656

The research firm said of the 146 U.S. and European banks, hedge funds and investors it surveyed, most “believe another major financial-services firm will fail as a result of the ongoing crisis in global markets — and they expect it to happen sooner rather than later.�

Almost 60% of the respondents expect another big financial firm will collapse within the next six months, while another 15% see it happening in six to 12 months.

“If you are looking for a silver lining in these findings, it seems that most institutions think we are currently in the most dangerous period for global financial-services firms,� Feenstra said. “Perhaps if the markets can make it through the next six months, the level of pessimism may begin to subside.�

CDS have a major flaw in that they are likely to payoff precisely when they can’t be collected upon.

To put it another way, CDS only prices the conditional probability that a major institution will fail given that the CDS market itself is still functioning.

But if Goldman is defaulting, what’s the likely hood Lehman is still going to be around to pay up on the CDS they sold ANZ, not bloody likely! In other words if any of the big players default then they are likely to take their counter parties with them.

Given this, all CDS appears over priced…. What a surprising effect that a credit crisis would decrease demand for default protection because those likely to write you default protection are unlikely to be able to pay up if default happens. Its like your insurance company burning down before your house does.

ANZ is laying on the tracks and the CDS train is approaching.