Replies to post #174319 on Naz News, Gappers and FLE''s

[BarbaraB]

I just found this on another board explaining why the Lehman auction was seen as a positive:


Jim Brown this weekend had these comments about that.

>>Weighing on the markets Friday morning was the Lehman CDS auction. Lehman had over $400 billion in debt covered by credit default swaps. In order for debt holders to exercise the default insurance a value on the debt needs to be set. This is done by an auction. Lehman's debt was auctioned for 8.625 cents on the dollar. That means a $100 in debt was sold for $8.65. The debt holder can now bill the writer of the default insurance for the difference or $91.35 per $100 of debt. This means insurers will have to pay $365 billion to holders of the debt. The International Swaps and Derivatives Association (ISDA) has only had to run nine of these auctions since 2005 but has five this month alone including WaMu. Traders were worried that the size of the insurance payments would cause further bankruptcies when the writers of the swaps were unable to come up with the billions in cash. After the auction the ISDA said it was successful and there were no failures. All insurers had put up collateral to cover their liabilities. In fact the ISDA said after taking into account the offsetting positions only about $8 billion in actual payments would change hands. Insurers had been very active in offsetting and hedging their positions. The feared disaster had been averted and the market rallied +800 points off the lows.
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[mcmike]

i've been fond of posting the CDS/derivatives images


the proliferation is scary BUT
how much of these heretofore unregulated derivatives positions are 'counterbalanced', cancelling, to a significant extent, each other out.

movement is afoot to bring some transparency to the CDS market
http://blogs.wsj.com/deals/2008/10/09/financials-got-you-down-cme-pitches-credit-default-swaps-the-safer-way/?mod=googlenews_wsj

i think we could get a big boost when we discover that not all these financial institutions are total greedy idiots that never counterbalanced their counterparty risk situation. Obviously some of the largest investment houses didn't handle their risk management very well. But they were at the center of the most lucrative and risky crappy collateralized obligations. it's pretty gloomy but i think there's cause for hope

lots of links here
http://www.creditwritedowns.com/

still think credit markets will stay largely locked until they are guaranteed a safety net for new loaning