Why are CDS's returning so little???

T

texrex2002

I was reading this over on zerohedge: http://zerohedge.blogspot.com/2009/06/recent-average-cds-auction-recovery.html#disqus_thread

The auction they hold to settle up with the CDS holders is for the underlying bonds, isn't it? So if there's a credit event (lets say a bankruptcy) they have an auction on that company's bonds to determine their fair value, and then pay out the difference on the CDS's, right???? So if a $100 GM bond sold at this auction for 7 bucks, then CDS writer would have to come up with $93 for each contract they wrote, right???

So I guess I don't understand why the CDS's are supposedly only paying 10%. Are the bonds of these bankrupt companies still going for 90% of face value????

: confused :
 
I think you misread. The 10% is the recovery rate. So, if a bond defaults, the protection seller pays 90%

Quote from texrex2002:

I was reading this over on zerohedge: http://zerohedge.blogspot.com/2009/06/recent-average-cds-auction-recovery.html#disqus_thread

The auction they hold to settle up with the CDS holders is for the underlying bonds, isn't it? So if there's a credit event (lets say a bankruptcy) they have an auction on that company's bonds to determine their fair value, and then pay out the difference on the CDS's, right???? So if a $100 GM bond sold at this auction for 7 bucks, then CDS writer would have to come up with $93 for each contract they wrote, right???

So I guess I don't understand why the CDS's are supposedly only paying 10%. Are the bonds of these bankrupt companies still going for 90% of face value????

: confused :
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I have a simpler theory. I've gathered that CD's are used for the banks to borrow your money and my money at a very low interest rate so they can turn around and lend it at a higher rate. Well, when the US Gov't is giving them billions of dollars for free, they don't have to entice us with high rates of return on the CD's. Just a theory though...
 
Quote from pianoman_28270:

I have a simpler theory. I've gathered that CD's are used for the banks to borrow your money and my money at a very low interest rate so they can turn around and lend it at a higher rate. Well, when the US Gov't is giving them billions of dollars for free, they don't have to entice us with high rates of return on the CD's. Just a theory though...
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pianoman: I was refering to Credit Default Swaps (CDS's) not Certificates of Deposit (CD's).
 
Quote from pianoman_28270:

I have a simpler theory. I've gathered that CD's are used for the banks to borrow your money and my money at a very low interest rate so they can turn around and lend it at a higher rate. Well, when the US Gov't is giving them billions of dollars for free, they don't have to entice us with high rates of return on the CD's. Just a theory though...
More...


I do agree with your CD theory, though, pianoman.
 
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