Primus CEO: Fannie/Freddie Impact Minimal, CDS Will Endure

Monday, Primus (PRS) CEO Tom Jasper made a presentation at a Lehman Financial Services Conference; this is an extraordinary coincidence of timing given all the questions regarding the settling of credit default swaps [CDS] on the various pieces of Fannie (FNM) and Freddie (FRE) capital. A settling of CDS contracts (which appears likely given comments by ISDA, the International Swap and Derivatives Association) would be the largest such action ever taken, and this has people nervous.

As Primus' 8-K filing Monday suggested, however, it really should be close to a non-event for all the CDS on references above the government's new senior preferred stock. Those have become "full faith and credit" obligations of the US government, and should therefore trade at a very tight spread to regular Treasuries – and because the loss on a CDS contract equals the payment (par value) less the recovery value (extremely close to par), Primus' $215 million in notational swaps on the senior and subordinated debt of Fannie and Freddie shouldn't net out to any significant losses.