Scratch that. It was 4 billion received on 300 billion of CDS obligations. If my calculator is working correctly, that's 1.3 cents on the dollar. How many counterparties got annihilated in the process?
When a problem becomes intractable enough, the governments can just step in and cancel all the CDS contracts... what are the legal recourse for those holding the contracts? No sane jury will stand by them.
These are unregulated and not traded on any exchange. The problem, no - crisis - they they've created is that no one knows who is exposed to them, and by how much. This is why banks and financial institutions won't lend money. They're afraid the recipient has exposure to CDS liabilities. Even if that borrower never pays, it will mean they didn't pay because they went Bankrupt, and it will mean they won't pay back the borrowed sums, either. If you're going to go bankrupt, you go all the way. And here we go again: http://www.bloomberg.com/apps/news?pid=20601087&sid=aYVpUkoxP6Jo&refer=home http://www.nytimes.com/2008/10/19/washington/19summitweb.html?_r=1&hp&oref=slogin The never ending 'global summit' meetings to attempt to prevent mass panic - this time hosted by W at the White House.
now comes the deed. The money is owed to HedgeFunds. The Gov't comes, in and wipes the slate clean, so as not to hurt 'financial institutions', and bye bye funds. This isn't rocket science. Back in Sept. , it was obvious that Europe and the US were in concert; then Asia joined. I said at the time, if you see an edict after their close, you'd see it here. Then, the bank bailout. So do you really think that, after liquifying the bank with money stolen from the public, the same public that is ready to overrun the Capitols of the world, they are going to side against those banks? Desparate times call for desparate measures. And there are no more 'conspiracies'. Just, the next horrible event that will happen. Pandora's box is open.
The only problem in the derivatives market is the counterparty risk uninformed people throwing around notional $ amounts are not educated enough to talk about the subject. Many of these contracts have set payments based on a differential so they are marked to market on a regular basis. Pabst is the only one who has added any value to this thread if any one here has actually been involve in the otc swap market please add a comment here to reduce the panic that this misinformation causes.
This kind of reminds me of how the media was throwing around a $75 TRILLION number for the CDS market . . . but what they didn't tell you was the fact that the number they were quoting included both "sides" of the trade . . . Thus, the REAL number is somewhere around half that . . . something like $34.8 trillion. Once again, a veteran trader like Pabst is able to add valuable COMMON SENSE to what the mainstream financial media has very little knowledge about!
While your example is a good one, you forget to add that the hedge funds and other "parties" that sold the CDS has had to comply with stringent collateral requirements . . . As Lehman CDS fell in value ( before and after their BK ), protection sellers would have had to provide increasing amounts of Treasury bonds or other cash-like investments as collateral for those contracts. "The mark-to-market on the CDS is margined daily as a credit event draws near, and that mitigates a large, lumpy payment at the end," said Peter Goves, another Citigroup strategist. "In the Lehman case, the largest collateral payments would have been required in the four or five days following the bankruptcy filing in mid-September, when spreads on senior debt widened from around 700 basis points on the five-year contract to around 7,000 basis points, based on the then market view of an estimated 30 percent recovery, Hampden-Turner said." The cash settlement CDS auction on Oct. 10 set final recovery on the CDS at an even lower 8.625 percent. http://ph.news.yahoo.com/rtrs/20081017/tbs-lehman-cds-settlement-7318940.html
That's much needed perspective, right there. The Lehman CDS settlement saw a net exposure of 2% outstanding notional. Even though Lehman went bankrupt, and CDS insured debt traded for 91 cents on the dollar (meaning sellers had to shell out 91 cents for every debt contract insured - at a 10 to 1 basis), the market saw only a 8 Billion net loss - on 360 Billion PAYABLE. However, should be noted those figures were for that session only. Deritiive counterparties who sold all this shit now becoming due have been marketing-to-market their positions continously, and hedging losses continously. The real question - how much did counter-parties lose, OVERALL - from Lehman CDS Sales, start to finish. That would give a far more realistic guess as to market exposure on the hundreds of trillions floating out there. Its like if some bank sold derivatives, and their position continuously went against them. What does the bank do? Hedges and buys offsetting derivatives at each incremental move against them from other sellers. The end effect is they loose, but not that much. You want the truth? I got suckered into the whole derivative black-hole nightmare painted by media. Until I saw Lehman settlement and realized we'd been had. There is no derivative blackhole. It all gets hedged and pared down to maybe 5-15% of their total theoretical exposure. This is Bankers of America United terrorizing Mainstreet to socialize their losses and juice their accounts. A nice little slice of FINANCIAL TERRORISM, right there. Same with the day after the 1st bailout bill was voted down. Plunge Protection Team decidedly absent from the guaranteed biggest Bleeder yet, and the Market tanked what? 10%?? Oh yea. Wallstreet put the hurt on and we panicked. And we're letting them. Sheep to Slaughter.