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September 3, 2008

This is a synthetic market.

Analysis of: Bank Debt Risk Rises as Writedowns, Losses Exceed $500 Billion | www.bloomberg.com
This analysis is solely the work of the author. It has not been edited or endorsed by GLG.
Analysis By:
John Jukoski, Jr., First VP & Director of Collateral AnalysisJohn Jukoski, Jr.
FormerFirst VP & Director of Collateral Analysis, Federal Home Loan Bank of Atlanta
Implications: Let me be brief.  This is a synthetic market that allows participants to express their sentiments (wager) without participating in the cash market.  Beware reading too much into the levels at which items trade in any synthetic market.

Analysis: The CDS market facilitated the current credit market demise.  In late 2005 the CDS market was 4x-5x times the size of the cash market.  Why would anyone pay more in the cash market when the synthetic market was cheaper.  Firms could not raise money at reasonable levels because speculators were betting against them in the synthetic market, with the result of bringing the cash market down with them.  Derivates have an important roles in credit markets.  This application of CDS is not one of them.

Other Analyses of the Same Source Article:
Macro Trends Spells Doom for Banks and their Profits
August 26, 2008, Author: GLG Expert Contributor
Have Bank's Revealed Everything? Default Protection is Under - Rated!
August 20, 2008, Author: GLG Expert Contributor
Bounce in global bank shares will be limited from here
August 19, 2008, Author: GLG Expert Contributor
Earningd Plunge At Least 95 % : An Indicator of The Affect of Debt-Related Investments!
August 18, 2008, Author: GLG Expert Contributor
Factor In Reality
August 18, 2008, Author: John Salomone, Managing Director, Structured Finance International, LLC

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