MS, Citi, and GS Do Not Want CDS Visibility

L

libertad

http://seekingalpha.com/article/117295-bad-bank-and-draft-bill-spook-cds-traders-and-wall-street


She had obviously not read the “anti-speculation” bill being passed around the House by the Chairman of the Agricultural Committee. If Congressman Peterson has his way in forthcoming weeks, Goldman Sachs (GS) and Morgan Stanley (MS) will need to figure out the extent to which their OTC derivatives business will shrink this year; both rely on OTC derivatives trading for as much as 40% of their profits. “There is no question that more than 70% of interest-rate and currency swap counterparties will fiercely resist the clearing house umbrella being proposed in Congress,” said a Citigroup (C) dealer who estimated that OTC transactions make up 30-40% of his overall trading profits.

In other words, while the proponents of the Bad Bank are focusing on toxic mortgage-backed securities, Congressman Peterson’s bill, which has a fair chance of success, threatens the earning potential of the “residual” good banks. JPMorgan Chase (JPM) held $87 trillion of derivatives as of September 30, 2008, 96% of which were in the OTC market. Bank of America (BAC) held $38 trillion, 94% in OTC contracts. It has been widely acknowledged for many years that OTC derivatives, besides qualifying as a core profit segment in Wall Street balance sheets, are absolutely critical for the operations of hedge funds and multinational corporations.

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The CDS market "going public" (becoming visible) will close a major profit venue for the big trading firms....
 
CBOE TOP TEN MOST ACTIVE CALLS - Equity Options

10 GS Mar 100.0000 6672 3.6500 2.1800 74350

I think GS shares not moving above 100...
 
The real reason that these firms do not want visibility on an public electronic exchange is because the commission markups that have been charged in the past will shrink dramatically....

The major point here is that a true brokerage is in the "commission business"....

Over the years the difference between the bid ask on stocks....and the direct access to stock trading....basically closed the door on stock commissions being a viable business for brokerages....

It used to be that the most successful brokers would build huge stock positions against a large spectrum of clients....several of them....and would make quite a bit of money when it became time to move the position.....Moving the same position today would not generate even 1/10 of what it used to generate before electronic direct access trading....

So the move to the CDS market was just a natural move to huge spreads and markups....which also was to be done in huge size by institutions because of supposed insurance requirements with respect to debt positions and requests....

When the CDS goes to a visible direct access electronic market....the same thing will happen...the ability to create fat spreads and markups goes away....

It is just so uncanny how perfect...the perfect storm is....
ratings agencies paid for ratings....big brokerages getting the fattest commissions....all the way to the desire of nonqualified buyers wanting homes....

What a perfect storm....

What a mess....
 
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