30 Oct '11, 1pm

A way to explain why this rebound was massive

The banks “voluntarily” took a 50% haircut. Because the write off was voluntary, there would be no triggering of credit default swaps clauses. If you bought credit default swaps on a certain bank’s debt (lets say JP Morgan , but it could be any bank) because you think that Morgan is exposed to too much credit default swap risk. If Goldman sold you the CDS, they could and would in turn hedge their risk by shorting some quantity of Morgan stock, or perhaps if the risk was sizeable enough, the S&P as a whole. When they took that voluntarily haircut, the risk evaporated. There would be no CDS event. So why buy CDS? Time to cover. The shorts get covered. The risk to financials was cut by a large, somewhat murky amount. But it was definitely cut, so buy some risk assets. This puts long/short hedge fund is in a short squeeze. The high-frequency-trading algo computers notice the m...

Full article: http://www.investmentmoats.com/stock-market-commentary/a-...

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A way to explain why this rebound was massive

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