Discussion in 'Wall St. News' started by achilles28, Oct 12, 2008.

  1. achilles28


    Last Friday was the Settlement auction for Lehmans CDS debt.

    From that, came some answers:

    Lehman had 120 Billion in bonds outstanding.

    By last Friday, CDS outstanding insured (Sold) was 400 Billion Notional.

    That means CDS Insured to Outstanding was ~3.5 to 1.

    We're told CDS Insured-to-Outstanding is traditionally 10 to 1.

    What happened?

    An Emergency Netting Session took place the Sunday before Lehman went under so counter-parties could offset or nullify trades.

    So, the original exposure might have been 10-to-1, prior to Fridays Auction.

    Further proof - Lehmans debt sold for roughly 8.5 cents on the Dollar.

    Implies for every buyer, there were 10 sellers. So, that rule-of-thumb (10-to-1 leverage) seemed to hold.

    So, on Friday, there was 400 Billion in CDS Insured Debt.

    Lehmans debt sold for 8.5 cents on the dollar.

    Meaning CDS Sellers had to fork over the equivalent of 400 Billion x 91.5 cents = 360 BILLION.

    Thats a staggering amount, considering the entire financial industry - who underwrote that insurance - is either teetering, bankrupt, or nationalized.

    So what happened on Friday?

    The Auction went great. 360 Billion in Counterparty Losses. And the Market? Not even a hiccup! In fact, we rallied 1000 pts!!

    Sound strange?

    So I do some digging:

    Eraj Shirvani, chairman of International Swaps and Derivatives Association (ISDA), the industry body that manages the auctions, said these concerns were misplaced. (NOW HE FUCKING TELLS US) "Sellers of protection mark their positions to market every single day. So those firms have already marked down and provided collateral against their positions. As a result, there should be little or no unanticipated additional cost involved in the settlement of Lehman CDS,".....Net exposures were usually around two per cent of the gross amount, which vastly reduced the potential cashflows. Assuming $360bn of gross exposure, this would translate into $7.2bn if these estimates are correct.

    And here's what Forbes has to say on Lehman:

    "Buyers of insurance are also sellers and vice versa. The International Swaps and Derivatives Association says all this netting out means the ultimate payout among trading partners may be closer to 2% of the gross outstanding $400 billion, or $8 billion."

    So 360 Billion Payout = 8 BILLION PAYOUT?!?!

    Shirvini basically said that CDS Sellers marked-to-market and hedged their exposure daily.

    The net loss was a 2% differential presumably from the increased spread as industry/risk/credit markets worsened.

    CDS Sellers offset their sales with buys at higher premium as the markets tanked = 2% loss.

    2% sounds low, but its plausible.

    CDS spreads on Fannie Debt shortly before they went under were 7.5%.


    What does this mean?

  2. It was the continuous marking down from $xxxB to $xB that did the damage.
  3. achilles28


    Do you mean the continual cost to re-hedge that exposure?

    Ah, fuck. I thought of that then forgot.

    Never mind, thread deleted.
  4. achilles28


    Do you have an idea what their total exposure or loss was, %-wise, on their CDS-insured outstanding?

    2% was the net loss for the final day.

    But those losses accumulated over time.

    So, the total loss on their CDS insurance was much higher than 2%. Which I thought...
  5. There is still the risk of counterparty failure. Wait for it:D
  6. this tells me the complexity of this cds market is not good for anyone. all it does is allow scum to skim the peoples money under the guise of providing a supposed service.

    anything this obtuse is useless.
  7. It works for the Cosa Nostra.

  8. doesn't the other shoe - $270B ? debt from the auction fall at
    Lehman's bankruptcy hearing ?
  9. achilles28


    Not sure.

    The auction last Friday was to discover price for CDS settlement.

    Which is altogether separate from what actual bondholders get once Lehman is 100% liquidated.

    They've still gotta go to court and wait in line behind secured creditors.

    From where I stand, the Global Pledge to shore up should stabilize CDS markets for Corporate Debt.

    There's still the problem of mortgages tranches underwritten with derivative paper.

    The housing market and foreclosures could still cut deep losses. It's only a 2-4 Trillion dollar potential loss from Bubble Top to fair value. But all those CDO's and Tranches had derivatives written on them.

    Exactly like CDS - insurance that those mortgage tranches default, XYZ bank will pay the outstanding difference on the CDO at full maturity.

    Thats apparently leveraged 10 to 1, so more writedowns and big losses are inevitable if US Housing continues to fail.

    Which it should. We're just entering a recession...
  10. can't pretend that i know much about the process only the huge
    amounts involved - supposedly huge - 2% ???

    the housing is a real mess, who really has possession of the
    mortgage, which house no longer exist and which will have to
    be demolished, what remains is a large multi-year oversupply
    as you say the amount's smaller but the recession's on
    #10     Oct 14, 2008