Argentina And Banco Espirito: What About The Derivatives?

bombshell willieIf Banco Espirito goes under, the default could trigger $29 billion in bondholder claims, and $120 billion in credit default claims. 
However, it’s not the $120 billion in CDS claims that are visible.  The real danger lurks in the “daisy-chain” of hidden counterparty default that could trigger a big meltdown.    Remember AIG/Goldman?   That melt-down – which triggered the big bailout banks – was likely triggered either by the Bear Stearns or Lehman collapse.
The former happened several months before AIG and Goldman.  When Bear collapsed, Bernanke assured us it was isolated and contained.  “Shalom Ben!” – how did the statement work out for you?

Will the Argentina default and the coming one of Banco Espirito trigger a credit default swaps meltdown?


 

Submitted by PM Fund Manager Dave Kranzler, Investment Research Dynamics

Argentina is interesting because of the legal issue surrounding the specific Government bonds on which it has now defaulted.
I called Banco Espirito as a likely bankruptcy after the stock exhibited Enron-esque characteristics.
As that one unfolds, it looks like the entire corporate structure above the bank and with the bank itself is engulfed with fraud.

And now we find out that Goldman Sachs plugged its client base with BES bonds and stock.  Classic.

The more interesting question in both cases has to do with the credit default swap derivatives.   While the default could trigger $29 billion in bondholder claims, Bloomberg ran a story a couple days ago that suggested the default on  this one bond issue could trigger $120 billion in credit default claims:

 

 

The details are buried in the bottom of the news report.  Since I have not seen anyone mention the $120 billion, I assume that – just like with the footnotes to financials statements – I guess no one read the full article.

However, it’s not the $120 billion in CDS claims that are visible.  The real danger lurks in the “daisy-chain” of hidden counterparty default that could trigger a big meltdown.  Remember AIG/Goldman?  That melt-down – which triggered the big bailout banks – was likely triggered either by the Bear Stearns or Lehman collapse.  The former happened several months before AIG and Goldman.  When Bear collapsed, Bernanke assured us it was isolated and contained.  “Shalom Ben!” – how did the statement work out for you?

The S&P futures are down 15 points right now on the back of the Argentina/BES news.  It’s not because of the news itself.  It’s because of the related skeletons in the closet that are connected to the events that may be poised to jump out…

Better check the bond and derivatives holdings of your favorite bond fund – you know, the bond funds that your genius investment advisor has you invested in because “they have a good yield.”