Credit default swaps: Monolines face litigious and costly endgame
Any discussion of a CDS counterparty default has to include the monoline guarantors.
|A bum wrap|
|Notional CDS bought from monolines 03 –2008||Write-down|
|Merrill Lynch||$18.8bln||$538mln (Q4 2007) and $800mln (Q1 2008)|
|Citi||$10.5bln||$1.5bln (Q1 2008)|
|Source: Standard & Poor’s|
These firms have lurched from one downgrade to another as the implications emerge of their exposure not only to sub-prime ABS CDOs but more recently to guaranteed investment contract (GIC) funds. Any list of counterparties at risk of default has to include several big monoline names. "All monolines that have been significantly involved in structured credit will become effectively insolvent," is the bleak prognosis from Andrea Cicione at BNP Paribas.
What does this mean for their outstanding CDS? Most of the CDS written by the monolines are bespoke contracts that are not traded under Isda agreements – and as such fall into the high-risk single-names category that would not be eligible for clearing.