NY Oct 8 (Reuters) - "The value of credit default swaps backed by defaulted Lehman Brothers bonds will be set on Friday with protection sellers expected to face massive losses of around 90% of the insurance they sold. Bondholders have seen their investments virtually wiped out by Lehman's bankruptcy filing on Sep 15, with most of the defaulted bonds which will be used to settle the swaps trading in the area of 12-13 cents on the dollar according to MarketAxess." emphasis added http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0841811720081008 estimates are the payments on Lehman's bonds alone will be $350B Washington Mutual cds auction will be held Oct 23 "If the valuations arrived at in these auctions prevent swaps sellers from meeting their obligations, expect to see lawsuits. âBecause of the lack of precedent and the complexity of the legal instruments there is the possibility that buyers and sellers are not going to see the process in the same way,â said Mr. Swett. âWe are dealing with virgin territory in a lot of ways here.â " http://www.financialweek.com/apps/pbcs.dll/article?AID=/20081006/REG/810069975/1036 fannie mae freddie mac Oct 2/6 auction results http://www.creditfixings.com/information/affiliations/fixings.html scroll to bottom of page to view iTraxx Index charts
From Reuters: Twenty-two dealers will participate in the auctions, which will determine how much protection sellers will recover after paying out the insurance. The timeline for the auctions follows, according to JPMorgan. 9:45 a.m.-10 a.m. Auction participants will submit bids and offers for the debt backing the credit default swaps, which will be used to determine the initial recovery rate of the swaps. 10:30 a.m. Auction administrators Creditex and Markit will publish the initial recovery price and the open interest for the contracts will be published. The open interest reflects the amount of bids and offers that have been made, and will show if there are more buyers than sellers, or vice versa. 12:45 p.m. -1 p.m. Participating dealers will submit limit orders for the debt on behalf of themselves and their clients to fill the open interest 2 p.m. The final price of the auction will be published. (Reporting by Karen Brettell; Editing by Chizu Nomiyama) ---------------------------------------------------------------------------- The Big Picture: "$400 Billion Lehman CDS Unwind?" http://bigpicture.typepad.com/comments/2008/10/lehman-cds-unwi.html#more Reuters: "Lehman CDS settlement auction timeline" http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0841811720081008 FT: "Lehman exposes faults in credit default swaps" http://www.ft.com/cms/s/0/04733ac8-9408-11dd-b277-0000779fd18c.html FT: "Banks prepare for CDS pay-outs" http://www.ft.com/cms/s/0/5911e2d8-9407-11dd-b277-0000779fd18c.html ---------------------------------------------------------------------------- My question is who-tf were the major sellers who are going to loose their ass today...?
This should be interesting. If its a big hit, fuck, markets could get halted today. Read today Lehman bonds are trading at 13 cents on the dollar. Implying the CDS settlement price will be 87 cents on the dollar. That is absolutely huge. The real question is how much was insured and who insured it. If traditional assumptions hold and insured debt was 10 to 1 outstanding. LOOK OUT. Thats roughly 3.5 Trillion dollars exchanging hands today. Something's gotta give. If the FED backstops, its still bad - and super inflationary. Just think, because one fucking investment bank goes under, the FED pumps in more liquidity - say 2 Trillion - to backstop their debt, than was pumped in THE ENTIRE BAILOUT.
My questions - why is the expected payout only 350 billion when we're told CDS was a 10 to 1 leveraged instrument. Going by that figure, exposure would be close to 4 trillion. Also, I can't help but to think sellers, if caught with insurmountable losses on insurance will just reneg and refuse payment.
I think you may be a bit confused on how the idea of leverage applies to what was done within the CDS market. Simply put, investment banks were allowed to sell CDS's without allocating the capital that they would eventually need to pay out on defaults and banks were allowed to borrow money to purchase CDS's that were "AAA" rated and eventually went to 0. The number is the $360-$400B range, definitely not in the trillions. The Big Picture: "SEC Deregulation Let Banks Leverage Up" http://bigpicture.typepad.com/comments/2008/10/sec-deregulatio.html Seeking Alpha: "Leverage 101: The Real Cause of the Financial Crisis" http://seekingalpha.com/article/97299-leverage-101-the-real-cause-of-the-financial-crisis
Yea, I'm aware of that. I thought long-term debt (bonds) was 350 Billion - not 150 billion. But its the insured to outstanding notional. We're told its 10 to 1. But in this case, the predicted payout is 3-to-1 or 4-to-1. Where are the stats on the actual levels of insured to actual debt? Who has that information?
The pricing on these types of assets is what we need to start to put in some kind of a bottom. Once true market valuations are seen from an auction like this, banks's comfort level regarding how much capital they need to have on hand for when their own assets are priced will increase.
The total CDS contracts outstanding are around 60 Trillion. Yes, I'm serious. Yes, this is the root of the current market decline. Until these instruments are priced and people can know what to expect, we are going down. Would be nice if had, ohhhh, I don't know, a central clearinghouse for this exotic, synthetic garbage?
http://www.bloomberg.com/apps/news?pid=20601087&sid=aa6nmsv7BakE&refer=home More peices of the puzzle of who is paying out default insurance moneys.