Comments on: Are CDS holders dooming Gannett?

By: Dan Hess

Dan Hess — Tue, 23 Jun 2009 18:49:20 +0000

Who is writing these CDS’s on Gannett? Is it more CDS junk left over from AIG?

In that case, the government would be actually helping to pay for companies to be destroyed. Beautiful. That needs to stop. If the government is paying on CDSs through AIG, it should at least do so at a level far lower (say 50 cents on the dollar, purely to help resist deflation) that pushes creditors to the table.

It should be that creditors and business managers struggle hard together to find value and savings.

Felix, you are a good man for bringing this to the attention of so many.

Pray tell, who is the ultimate payer on most of these Gannett CDS contracts?

By: Felix Salmon

Felix Salmon — Tue, 23 Jun 2009 18:38:22 +0000

Robby, start here: http://www.portfolio.com/views/blogs/mar ket-movers/2009/01/25/how-to-resolve-the -cds-basis-trade-blowup

By: robby

robby — Tue, 23 Jun 2009 17:17:38 +0000

Can you provide some additional detail/explanation of the negative basis trade or point me to some articles that explain its mechanics? Is the idea simply that that the amount you pay in premiums on the cds you buy is less than the interest payments you receive on holding the bond, and you are guaranteed to receive par at maturity? Does the relationship always run in this direction or is it sometimes reversed (i.e. are the cds premiums ever higher than the bond interest payments)? If the bond pays more in interest than the premium payments on the cds, is it merely a function of counterparty risk? What would be the explanation for the bonds paying less than the cds premiums? Anything you could point me to would be much appreciated. Thanks.

By: Ken

Ken — Tue, 23 Jun 2009 16:02:40 +0000

“…the people who sold Gannett CDS have an incentive to buy up the bonds (which are now very cheap) and help the company avoid default.”

Assuming, that is, that the seller is not in a position similar to AIG. Then they just might say “Oops! Looks like we wrote some insurance we can’t cover. Sorry!” The CDS buyers would then be out of luck, unless the government stepped in again.