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Tarn P Crowe
Tarn P Crowe

Is it possible Fairfax Financial might have raised their CDS bet?

February 13, 2008 | About:

With AIG's recent report of larger than expected CDS "mark to mark" losses and default spreads on AIG hitting over 200 bps as of today, Odyssey re & Fairfax Financial would have received another boost to the value of their enormous CDS portfolio (AIG is one of their CDS positions held most likely for hedging rather than investment purposes).

I believe it is more probable than not that Fairfax would have taken profits on positions in CDS positions in Countrywide, MBIA & Ambac amongst others over the last few months. That is my expectation given the excellent pricing Fairfax would have received, MBIA & Ambac were recently priced for a 70% chance of bankruptcy. However, this is pure speculation and journalistic opinion on my part. We won't know until they report their results for this quarter.

Economic conditions have degenerated rapidly throughout the world particularly in North America but also Europe, Japan and other regions. Risk continues to be re-priced into corporate bonds and expectations are that default rates will increase considerably from current levels.

Further, in two interviews given since November ,Prem Watsa, CEO of Fairfax, has maintained that we that we are only at the beginning stages of a credit crunch and the US could be facing a Japan like economic situation of deflation.

Finally, the largest equity positions recently added by Fairfax are in healthcare/pharmaceutical stocks which definitely have defensive characteristics in a recession like environment.

The question therefore I want to pose is this , if Prem Watsa feels we are only in the beginning stages of a credit crunch and Fairfax continues to set up its equity and bond portfolio for recession, is it possible that during the 4th Quarter 2007 Fairfax Financial may have raised its CDS bet on some names perhaps already held or others not held at the end of the 3rd Quarter 2007?

Disclosure: I own shares of FFH & AIG

Disclaimer: The opinions expressed by the author in this article are not intended as investment advice and should not be relied upon as investment advice.

About the author:

Tarn P Crowe
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.7/5 (3 votes)


Valuehound - 9 years ago    Report SPAM
It is possible if they are able to buy CDS's which bonds/debt which doesn't already have default risks priced in, but I kind of doubt it given that CDS premiums have already risen sharply, At this time they might be looking at unloading some of the CDS' that are already indicating a high probability of default.

Disclosure: Long FFH

AlbertaSunwapta - 9 years ago    Report SPAM
Watsa could have bought, sold, or kept the same position. It's pretty tough to second guess this one. I'd guess that "easy" money has likely already been made.

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