The final tipping point of whole credit crisis, Credit Default Swaps, is probably going to be unwound tommorow. Forget losses from Bad mortages and loans, this was only child game.
There are Credit Default Swaps, which could easily take down to BK 50-80% of banks in the world.
current CDS market positons are around 750 trillion of USD. Thats the thing that WS and goverment forgot to tell you about.
sorry for my english, I am bit drunken, because of this fucked up situation - despite profiting from it with a lot of put option positons, while loosing my shirt with long positions
The main reason for sell-off this week is this:
from reuters:
Lehman CDS sellers face massive losses in auction
NEW YORK, Oct 9 (Reuters) - Banks, hedge funds and other sellers of protection on Lehman Brothers' (LEN.N: Quote, Profile, Research, Stock Buzz) (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) debt are facing losses in the area of 90 percent the insurance sold when the value of the failed bank's credit default swaps are settled in an auction on Friday.
If sellers of protection outweigh buyers in the auction, as some analysts expect, losses may be even higher.
Lehman's bankruptcy filing last month sent its bond values plunging as the majority of the investment banking assets that had supported the debt were purchased by Barclays Bank, leaving debt holders at the abandoned holding company with little to reclaim.
The auction to settle credit default swaps protecting the debt will be one of the largest settlements of contracts in the $55 trillion market, with around $400 billion in contract volumes estimated on Lehman's debt.
When a borrower defaults on their debt, sellers of protection pay buyers the full sum insured, and in return receive the defaulted debt or cash equivalents.
To determine the cash value of the default swaps, protection buyers choosing to settle the contracts in an auction will deliver the cheapest debt that qualifies in the contracts.
The majority of Lehman's bonds are trading in the area of 12 to 13 cents on the dollar, according to MarketAxess, indicating the swaps will only recover in that area. But there is a risk they could recover even less.
If more protection sellers than buyers choose to use the auction to settle the contracts, there will be a net open interest to sell bonds, which can push down the recovery.
"With so much uncertainty over currency, coupon and maturity, we feel most protection sellers will opt for cash settlement," said Tim Backshall, chief strategist at Credit Derivatives Research in Walnut Creek, California.
"
If there is a better recovery then expected, there is still going to be shitload of billions of losses somewhere in financial system - which will further cause casade of failures of other counter parties, which will further cause failures of other counter parties, which will further cause failures of other counter parties,which will further cause failures of other counter parties, which will further cause failures of other counter parties.....
one, more optimist blog post about tommorows auction:
http://www.portfolio.com/views/blogs...an-cds-auction
There are Credit Default Swaps, which could easily take down to BK 50-80% of banks in the world.
current CDS market positons are around 750 trillion of USD. Thats the thing that WS and goverment forgot to tell you about.
sorry for my english, I am bit drunken, because of this fucked up situation - despite profiting from it with a lot of put option positons, while loosing my shirt with long positions
The main reason for sell-off this week is this:
from reuters:
Lehman CDS sellers face massive losses in auction
NEW YORK, Oct 9 (Reuters) - Banks, hedge funds and other sellers of protection on Lehman Brothers' (LEN.N: Quote, Profile, Research, Stock Buzz) (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) debt are facing losses in the area of 90 percent the insurance sold when the value of the failed bank's credit default swaps are settled in an auction on Friday.
If sellers of protection outweigh buyers in the auction, as some analysts expect, losses may be even higher.
Lehman's bankruptcy filing last month sent its bond values plunging as the majority of the investment banking assets that had supported the debt were purchased by Barclays Bank, leaving debt holders at the abandoned holding company with little to reclaim.
The auction to settle credit default swaps protecting the debt will be one of the largest settlements of contracts in the $55 trillion market, with around $400 billion in contract volumes estimated on Lehman's debt.
When a borrower defaults on their debt, sellers of protection pay buyers the full sum insured, and in return receive the defaulted debt or cash equivalents.
To determine the cash value of the default swaps, protection buyers choosing to settle the contracts in an auction will deliver the cheapest debt that qualifies in the contracts.
The majority of Lehman's bonds are trading in the area of 12 to 13 cents on the dollar, according to MarketAxess, indicating the swaps will only recover in that area. But there is a risk they could recover even less.
If more protection sellers than buyers choose to use the auction to settle the contracts, there will be a net open interest to sell bonds, which can push down the recovery.
"With so much uncertainty over currency, coupon and maturity, we feel most protection sellers will opt for cash settlement," said Tim Backshall, chief strategist at Credit Derivatives Research in Walnut Creek, California.
"
If there is a better recovery then expected, there is still going to be shitload of billions of losses somewhere in financial system - which will further cause casade of failures of other counter parties, which will further cause failures of other counter parties, which will further cause failures of other counter parties,which will further cause failures of other counter parties, which will further cause failures of other counter parties.....
one, more optimist blog post about tommorows auction:
http://www.portfolio.com/views/blogs...an-cds-auction
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