There are only a handful (or two) credit derivative product companies (CDPCs) in the world, and, unfortunately, I doubt many of them will survive this crisis.! Of course, at this stage, for anyone who understands their business (leveraged corporate-credit insurance), it should come as no surprise that they struggle (with iTraxx Europe widening from 20bp to 200bp in a year etc.). The intriguing fact about the whole story, however, is that so few, supposedly sophisticated, investors (investment bankers etc) saw it coming.
In fact, this week it was reported in the news that investment banks are facing losses close to 10bn euro on exposures to this tiny segment of the financial system. The total size of the sector is around 125bn euro and based on the movements in the CDS market I think losses of 10bn euro is an absolute minimum!
As I said almost a year ago (CDPC-credit derivatives product companies!, Feb 11, 2008) “It is not the most important segment of the industry but still I think its performance (if made public) will give us valuable information.” Exactly! I stick to that!
And as I have stressed over and over again, the ignorance of investors towards risk (read, overleveraging) will continue to be punished for a long time to come. Furthermore, I think this will weigh on sentiment and postpone a sound rebounce in risk appetite across the entire asset spectrum for some time. Meanwhile, the consistently well informed and prudent investor will continue to pick the low-hanging fruit, piece by piece!