Friday, October 17, 2008 12:29:23 AM
more must reads re. CDS: credit derivatives
Cramer's depiction re. the settlement of Lehman's CDS next week (Oct. 21) was priceless. He likened it to a group of greedy neighbors who all bought fire insurance on the Lehman house and then conspired to burn it down. And the insurance payout will be double the value of the house to all of those who now hold the UOMe bets if it collapses...
Day of Reckoning
On Thursday's "Sell Block" segment, Cramer sentenced AIG (AIG Quote - Cramer on AIG - Stock Picks) to a life sentence without parole. He said Oct. 21 will be a day of reckoning for the once great insurance company.
On that date, Cramer noted that the companies who wrote insurance policies against the debt of the now defunct Lehman Brothers, will be forced to pay up. He said that thanks to failed regulation by the Securities and Exchange Commission, the $158 billion worth of Lehman debt was allowed to be insured for $365 billion.
Cramer said he believes that AIG, which was given a gracious bailout by the federal government, is likely to be on the hook for most of this egregious amount. He said it's outrageous that the company's management could have allowed it to take on such an incredible amount of debt.
http://www.thestreet.com/story/10442796/2/cramers-mad-money-recap-outfoxing-the-hedge-fund-sellers.html
How can we let this continue? Why should parties who have no interest in someone else's debt be allowed to speculate on whether or not that debt will go into default? Why can't these CDSs be directly tied to the actual size of the debts being insured? In no case can the payout exceed the actual size of the debts? Sort of like a closed end fund with a limited set of shares (debt size) It can trade at a premium or discount to the the value while it trades, but can't pay out more than the debt size insured in case of default. I'm not smart enough to understand this mess. Why should you & I have to watch our government cut checks to the holders of Lehman's CDS for more $ than Lehman actually owed?
And to let hyenas circle a weak member of the herd, bid up the CDS, buy puts, short the shares of the common, spread rumors and drive the target to destruction is criminal imo.
here's more on these WMDs
Oct 15 (Reuters) - Regulators have stepped up calls since the collapse of Lehman Brothers last month for more supervision of the $55 trillion credit derivatives market to improve its safety and transparency.
Below are facts about the market to date.
HOW THEY WORK: Credit default swaps (CDS) are over-the-counter contracts between two counterparties that bet on whether a company will default on its bonds within a fixed period of time.
In its simplest form, one side of a CDS contract pays an annual fee to buy protection against default. The other side, the seller of protection, promises to cover losses in the value of the debt if a default takes place within the period of the contract.
When the market began trading, if a default or other agreed "credit event" such as change of control occurred, the buyer of protection would hand the bond over to the seller in return for its face value. Cash settlement is now a more common market option (see below).
Investors use CDS to hedge against cash investments or to speculate on the direction of the credit markets.
MARKET SIZE
end-2001: $918 billion
end-2002: $2.2 trillion
end-2003: $3.8 trillion
end-2004: $8.4 trillion
end-2005: $17.1 trillion
end-2006: $34.4 trillion
end-2007: $62.3 trillion
mid-2008: $54.6 trillion
Amount of outstanding contracts, according to the International Swaps and Derivatives Association (ISDA).
MARKET HISTORY
In the early 1990s dealers began to develop an organized market from ad hoc attempts by banks to hedge credit risks on their books.
In 1997, 1999 and 2003, ISDA issued agreements and definitions that helped standardize CDS contracts.
In 2004, indexes created by different investment banks merged to create the CDX series of indexes in North America and the iTraxx indexes in Europe, with Markit as the sole data administrator.
In spring 2005, the first auction was organized after a default to come up with a price for cash settlement of contracts, instead of requiring that the protection buyer deliver a physical bond.
In September 2005, the New York Federal Reserve Bank called 14 major dealers to a meeting on market operations after backlogs between trade and settlement became as long as 90 days.
This led to the creation of a central depository and an agreed protocol under which investors and dealers must request the approval of a counterparty to transfer the risk to a third party, known as novation. This enabled dealers to better determine risk exposures by netting out offsetting trades.
At end-July 2008 in a letter to the New York Fed, CDS dealers and industry organisations agreed on a set of goals to make market operations more efficient, including creation of a central clearing house.
In September 2008, Lehman Brothers (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) was the first major dealer to file for bankruptcy, triggering billions of dollars of losses by its counterparties and by sellers of protection on its debt.
CASH SETTLEMENT: Auctions for cash settlement of contracts have become standard practice, used to resolve around 13 credit events so far, according to the ISDA Web site. This has allowed the outstanding amounts of CDS contracts to expand to multiples of the number of outstanding cash bonds for the names that are most active.
The latest auctions in October covered the debts of Lehman Brothers and Fannie Mae and Freddie Mac.
CASH SETTLEMENT AUCTIONS - FORTHCOMING DATES:
Oct. 23: Washington Mutual (WAMUQ.PK: Quote, Profile, Research, Stock Buzz)
Nov. 4: Landsbanki (LAIS.IC: Quote, Profile, Research, Stock Buzz)
Nov. 5: Glitnir (GLB.IC: Quote, Profile, Research, Stock Buzz)
Nov. 6: Kaupthing (KAUP.IC: Quote, Profile, Research, Stock Buzz)
TARGETS AGREED WITH NY FED FOR END-2008:
* Creation of a central clearing house, which will start by clearing U.S. indexes and extend to other CDS contracts in 2009.
The Clearing Corporation, owned by a group of major dealers, is vying with The Chicago Mercantile Exchange (CME.O: Quote, Profile, Research, Stock Buzz), NYSE Euronext's (NYX.PA: Quote, Profile, Research, Stock Buzz) Liffe unit, the IntercontinentalExchange (ICE.N: Quote, Profile, Research, Stock Buzz) and others that plan to offer this service.
* All novations processed electronically on the same day.
* Trades unconfirmed over 30 days not to exceed one business day of trading volume.
* A plan that sets timeframes for achieving confirmation of electronically eligible trades on the trade date.
BACKLOGS: Business days worth of oustanding confirmations aged over 30 days -- a measure of efficiency of trade processing
June 2008: less than 1
March 2008: 1.3
December 2007: 2.5
September 2007: 3.5
June 2007: 2
December 2006: 3.5
February 2006: 7.5
Rough estimates based on line graph published by Markit.
BENCHMARKS: The most liquid instruments in the market are CDS on benchmark indexes that reference the five-year debt of portfolios of companies.
Markit iTraxx Europe -- based on 125 European investment-grade companies
Markit iTraxx Crossover -- based on 50 European companies mostly junk-rated with stable outlook
Markit CDX IG -- based on 125 investment-grade North American companies
Markit CDX HY -- based on 100 North American companies that do not rank as investment grade
UNDERLYING COMPANIES: About 3,400 corporate names, although that includes some duplication of senior and subordinated debt of the same companies, according to Markit.
NETTING: Average number of pre-netted and post-netted settlements per dealer per month
June 2008: pre 300,000, post 25,000
December 2007: pre 240,000, post 25,000
June 2007: pre 175,000, post 30,000
December 2006: pre 140,000, post 15,000
December 2005: pre 80,000, post 35,000
Rough estimates based on line graph published by Markit.
DEALERS INCLUDE: Bank of America, Barclays Capital, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Dresdner Kleinwort, Goldman Sachs, HSBC Group, JP Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, Royal Bank of Scotland, Societe Generale, UBS AB, Wachovia. (Signatories of July letter to New York Fed.) (Reporting by Jane Baird in London; Editing by Greg Mahlich)
http://www.reuters.com/article/euIpoNews/idUSLE19313020081015?sp=true
The Fed's move to backstop the banks just might prevent the destruction that almost took down the entire financial system a month ago that led to all of the brouhaha that brought Paulson to Congress:
The Feds Are Learning
http://www.thestreet.com/story/10442516/1/the-feds-are-learning.html
more on Lehman: $400 Billion Lehman CDS Unwind?
Thursday, October 09, 2008
http://bigpicture.typepad.com/comments/2008/10/lehman-cds-unwi.html
Cramer's depiction re. the settlement of Lehman's CDS next week (Oct. 21) was priceless. He likened it to a group of greedy neighbors who all bought fire insurance on the Lehman house and then conspired to burn it down. And the insurance payout will be double the value of the house to all of those who now hold the UOMe bets if it collapses...
Day of Reckoning
On Thursday's "Sell Block" segment, Cramer sentenced AIG (AIG Quote - Cramer on AIG - Stock Picks) to a life sentence without parole. He said Oct. 21 will be a day of reckoning for the once great insurance company.
On that date, Cramer noted that the companies who wrote insurance policies against the debt of the now defunct Lehman Brothers, will be forced to pay up. He said that thanks to failed regulation by the Securities and Exchange Commission, the $158 billion worth of Lehman debt was allowed to be insured for $365 billion.
Cramer said he believes that AIG, which was given a gracious bailout by the federal government, is likely to be on the hook for most of this egregious amount. He said it's outrageous that the company's management could have allowed it to take on such an incredible amount of debt.
http://www.thestreet.com/story/10442796/2/cramers-mad-money-recap-outfoxing-the-hedge-fund-sellers.html
How can we let this continue? Why should parties who have no interest in someone else's debt be allowed to speculate on whether or not that debt will go into default? Why can't these CDSs be directly tied to the actual size of the debts being insured? In no case can the payout exceed the actual size of the debts? Sort of like a closed end fund with a limited set of shares (debt size) It can trade at a premium or discount to the the value while it trades, but can't pay out more than the debt size insured in case of default. I'm not smart enough to understand this mess. Why should you & I have to watch our government cut checks to the holders of Lehman's CDS for more $ than Lehman actually owed?
And to let hyenas circle a weak member of the herd, bid up the CDS, buy puts, short the shares of the common, spread rumors and drive the target to destruction is criminal imo.
here's more on these WMDs
Oct 15 (Reuters) - Regulators have stepped up calls since the collapse of Lehman Brothers last month for more supervision of the $55 trillion credit derivatives market to improve its safety and transparency.
Below are facts about the market to date.
HOW THEY WORK: Credit default swaps (CDS) are over-the-counter contracts between two counterparties that bet on whether a company will default on its bonds within a fixed period of time.
In its simplest form, one side of a CDS contract pays an annual fee to buy protection against default. The other side, the seller of protection, promises to cover losses in the value of the debt if a default takes place within the period of the contract.
When the market began trading, if a default or other agreed "credit event" such as change of control occurred, the buyer of protection would hand the bond over to the seller in return for its face value. Cash settlement is now a more common market option (see below).
Investors use CDS to hedge against cash investments or to speculate on the direction of the credit markets.
MARKET SIZE
end-2001: $918 billion
end-2002: $2.2 trillion
end-2003: $3.8 trillion
end-2004: $8.4 trillion
end-2005: $17.1 trillion
end-2006: $34.4 trillion
end-2007: $62.3 trillion
mid-2008: $54.6 trillion
Amount of outstanding contracts, according to the International Swaps and Derivatives Association (ISDA).
MARKET HISTORY
In the early 1990s dealers began to develop an organized market from ad hoc attempts by banks to hedge credit risks on their books.
In 1997, 1999 and 2003, ISDA issued agreements and definitions that helped standardize CDS contracts.
In 2004, indexes created by different investment banks merged to create the CDX series of indexes in North America and the iTraxx indexes in Europe, with Markit as the sole data administrator.
In spring 2005, the first auction was organized after a default to come up with a price for cash settlement of contracts, instead of requiring that the protection buyer deliver a physical bond.
In September 2005, the New York Federal Reserve Bank called 14 major dealers to a meeting on market operations after backlogs between trade and settlement became as long as 90 days.
This led to the creation of a central depository and an agreed protocol under which investors and dealers must request the approval of a counterparty to transfer the risk to a third party, known as novation. This enabled dealers to better determine risk exposures by netting out offsetting trades.
At end-July 2008 in a letter to the New York Fed, CDS dealers and industry organisations agreed on a set of goals to make market operations more efficient, including creation of a central clearing house.
In September 2008, Lehman Brothers (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) was the first major dealer to file for bankruptcy, triggering billions of dollars of losses by its counterparties and by sellers of protection on its debt.
CASH SETTLEMENT: Auctions for cash settlement of contracts have become standard practice, used to resolve around 13 credit events so far, according to the ISDA Web site. This has allowed the outstanding amounts of CDS contracts to expand to multiples of the number of outstanding cash bonds for the names that are most active.
The latest auctions in October covered the debts of Lehman Brothers and Fannie Mae and Freddie Mac.
CASH SETTLEMENT AUCTIONS - FORTHCOMING DATES:
Oct. 23: Washington Mutual (WAMUQ.PK: Quote, Profile, Research, Stock Buzz)
Nov. 4: Landsbanki (LAIS.IC: Quote, Profile, Research, Stock Buzz)
Nov. 5: Glitnir (GLB.IC: Quote, Profile, Research, Stock Buzz)
Nov. 6: Kaupthing (KAUP.IC: Quote, Profile, Research, Stock Buzz)
TARGETS AGREED WITH NY FED FOR END-2008:
* Creation of a central clearing house, which will start by clearing U.S. indexes and extend to other CDS contracts in 2009.
The Clearing Corporation, owned by a group of major dealers, is vying with The Chicago Mercantile Exchange (CME.O: Quote, Profile, Research, Stock Buzz), NYSE Euronext's (NYX.PA: Quote, Profile, Research, Stock Buzz) Liffe unit, the IntercontinentalExchange (ICE.N: Quote, Profile, Research, Stock Buzz) and others that plan to offer this service.
* All novations processed electronically on the same day.
* Trades unconfirmed over 30 days not to exceed one business day of trading volume.
* A plan that sets timeframes for achieving confirmation of electronically eligible trades on the trade date.
BACKLOGS: Business days worth of oustanding confirmations aged over 30 days -- a measure of efficiency of trade processing
June 2008: less than 1
March 2008: 1.3
December 2007: 2.5
September 2007: 3.5
June 2007: 2
December 2006: 3.5
February 2006: 7.5
Rough estimates based on line graph published by Markit.
BENCHMARKS: The most liquid instruments in the market are CDS on benchmark indexes that reference the five-year debt of portfolios of companies.
Markit iTraxx Europe -- based on 125 European investment-grade companies
Markit iTraxx Crossover -- based on 50 European companies mostly junk-rated with stable outlook
Markit CDX IG -- based on 125 investment-grade North American companies
Markit CDX HY -- based on 100 North American companies that do not rank as investment grade
UNDERLYING COMPANIES: About 3,400 corporate names, although that includes some duplication of senior and subordinated debt of the same companies, according to Markit.
NETTING: Average number of pre-netted and post-netted settlements per dealer per month
June 2008: pre 300,000, post 25,000
December 2007: pre 240,000, post 25,000
June 2007: pre 175,000, post 30,000
December 2006: pre 140,000, post 15,000
December 2005: pre 80,000, post 35,000
Rough estimates based on line graph published by Markit.
DEALERS INCLUDE: Bank of America, Barclays Capital, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Dresdner Kleinwort, Goldman Sachs, HSBC Group, JP Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, Royal Bank of Scotland, Societe Generale, UBS AB, Wachovia. (Signatories of July letter to New York Fed.) (Reporting by Jane Baird in London; Editing by Greg Mahlich)
http://www.reuters.com/article/euIpoNews/idUSLE19313020081015?sp=true
The Fed's move to backstop the banks just might prevent the destruction that almost took down the entire financial system a month ago that led to all of the brouhaha that brought Paulson to Congress:
The Feds Are Learning
http://www.thestreet.com/story/10442516/1/the-feds-are-learning.html
more on Lehman: $400 Billion Lehman CDS Unwind?
Thursday, October 09, 2008
http://bigpicture.typepad.com/comments/2008/10/lehman-cds-unwi.html
TRADING: "More Signal...less Noise"
LIVING: "One World, One Family, Warm Heart" Dalai Lama
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