[DcifrThs]

New week, new trade idea.

i think it was mentioned before during the "crisis" last week, but i just read enough to feel comfortable with it.

i'd be fairly short the CDS for both goldman and merrill (short meaning that i'd bet the cost of insurance against default for goldman and merrill will fall)

they are both right now trading at a cost that implies a Ba1 rating (or B- or BB- i think from S&P, basically below junk/investment grade crossover) while they are both rated Aa3 (or AA i think, one of the top ratings).

clearly ratings lag markets and both may not perform as well as they have in recent years, but the cost of insurance against their default is treating them like they are junk. that isn't right imo.

i'd like to see how their corporate bodns have been trading (if they have any issued?) recently to get a sense for the actual spreads above treasuries and if the fear in the CDS market is also being exhibited in the corporate debt market. if the spreads have also jumped a ton, i'd long the spreads. (you execute this by taking a long position in the bond or a futures on the bonds and a short position in the similar duration treasury or treasury futures contract. you'd bet for the spread to narrow).

typically, i wouldn't want to be long corp bonds at or near historical lows of spreads, but if they jumped a ton as a result of subprime fears and fears that they may default due to holding massive portfolios of loans (for chryslter and other buy outs that haven't been digested by the public) then i'd want to bet they'll come back down when people realize this is just banking.

before credit derivatives, banks actually made loans based on the credit worthiniess of candidates and they profited off of the spread between their costs and the costs of their customers (in this case chrystler et.al.). the other side of the argument is that goldman & merrill didn't choose to make the chrystler loan so much as it fell into their lap.

either way though, even if those loans DO default, betting that merrill or goldman would default as a result imo is a losing bet.

i'd have a conviction of this at above 50%, maybe 60-70%. i'd think the CDS should fall to at least the A credit rating. goldman sachs traded as junk? jesus, that'll be the day.

anybody wanna take side bets on whether goldman defaults in 5 years? lol.

Barron