Asian-based asset management firm, Brentwood Group, fear that sellers of protection against default by three failed Icelandic banks may have to pay as much as 97 cents for every dollar of covered debt.
Brentwood Group apparently believe that as much as $7.6bn in funds may need to be transferred between counterparties. This is because many sellers of protection hedge themselves against having to pay out by taking out additional contracts with other counterparties. Nevertheless, the sum remains a serious hurdle for hedge funds who have reaped spectacular profits from the opaque market in credit default swaps but are now finding it difficult to raise funds quickly enough to meet obligations thanks to the high-leverage nature of their business model.
Brentwood Group sources suggest that as more banks and corporate fail, the credit default swap market may not be able to bear the strain should a very interconnected player collapse.
One of the Brentwood sources suggested that as hedge funds do not enjoy the same explicit US Treasury guarantee that the banks do, they are more likely to face severe difficulties in the months going forward.
