I read your analysis of BAC with interest.Â
It's still hard to believe that a bank as huge as BAC is at risk of cash flow, even though BAC has a huge unrealized loss, and Warren Buffett is selling it.
If the BAC is in danger enough to consider a bailout, why is the CDS quiet? No matter how much the Fed controls the situation, it's out of control when it comes to the CDS.
I'm sure the traders would have done everything to attack the BAC if they thought it was dangerous
Hi sir, thanks a lot for your question.
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With regard to CDS in general, besides the market becoming more and more illiquid with few institutions willing to write CDS compared to the past, Credit Suisse's default was a huge turning point for this market. Why? Despite the bank effectively went bust hence triggering the CDS, laws have been literally changed overnight to avoid the CDS being triggered in particular those written on the AT1 tranches. Since then the instrument lost a lot of credibility as a credit hedging with the result that it is now sporadically traded with the spreads out there barely moving despite increasing risks. Furthermore, this impacts many risk monitoring algorithms that without seeing CDS increasing aren't wired to capture the increasing risk on a specific name ultimately not reducing exposures while in reality they should (as Buffett is doing).Â
Thx for the reply
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So does that mean there is no way to know which banks are at risk in the current market? If CDS has become a derivative that no one invests in after the CS crisis, how do we know if banks are at risk at the moment when even financial statements are manipulated?
The numbers in the financial statements can be compared with public market and economic indicators such as interest rates, bankruptcy filings, and so on in order to gauge the real value of the assets in the books and compare them to the one showcased by a bank sir. Furthermore in every banks financial statements the assumptions used to MTM the assets and liabilities are disclosed and if those are not realistic/too far from reality is another warning sign about the true health of a lender