The Real Reason for market sell-off this week
 

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

The problems with CDs are just starting... I've been reading about this for a couple week, it's very hard to understand the logic behind them.

http://ftalphaville.ft.com/blog/2008...illion-payout/

Panmure Gordon’s Sandy Chen has this to say in a note out today:

We think one of the key drivers has been the tremendous potential demand for cash from counterparties, related to the CDS (credit default swap) payouts on the recent major credit events. To recap, the FNM/FRE CDS settlement auction happens today (6 October), the LEH auction on 10 October (Friday), and WaMu on 23 October. In these settlement auctions, the reference price for the underlying bonds will be set, thus determining the payout levels.

… We think that the CDS payouts related to these credit events will put tremendous strains on the financial counterparties that had written those CDS. We broadly estimate there could be US$50bn of payouts related to FNM/FRE CDS, and US$400bn of payouts related to LEH CDS. We think it highly likely that many counterparties, particularly hedge funds, will not be able to raise the cash to meet their ends of these bargains.
What will this mean? More failures amongst hedge funds, insurance companies and banks, and - given that CDS are largely OTC, meaning that there is limited visibility beyond the immediate counterparty - a lack of trust that translates into money markets remaining effectively shut. And whichever measure of financial stress/lack of liquidity is used - LIBOR-BaseRate gap, TED spread etc - it will remain at elevated levels as long as markets are worried about possible failures of counterparties (or counterparties’ counterparties).
How cheery.

another great blog post about it:
http://georgewashington2.blogspot.co...-is-d-day.html

Those guys arent usuall bloggers, it comes from ones, who precisely forecasted whole financial crises, not like your usual talking head on CNBC.

In the long run, everything will be fine. There are only 2 things driving the market down.

Fear and uncertainty.

:thumbsup

You hope.

the question is, how long run you mean? after 1929 it took 20 years and WW2 (huge stimulation for US economy) to reach same levels...

just heard on TV, that looses from tommorows action could be 100 bilions USD. some bloggers estimate losses as high as 300 bilions.
One thing is sure, even with 100 bilions USD losses, you have almost entire banking system BK after few weeks as it would trigger further CDS payments. Its fucking CASCADE.
I am not a guy, who just read about it somewhere, I am a guy who speculate on it from summer 07, while all those massmedia bullshit artists were spreading their BS. Now I am getting really scared.

They have no idea what is coming.

True, true.

Lets face the facts here. You are a pornographer not a financial expert. The same for anyone else on the board or who says "eh, it will be fine" as if they even really grasp what is going on. The fact is NONE of us really understand what is fully going on, not even the experts in the government or on wall street understand this. The entire world is trying to figure out how to fix this problem.

Maybe we should just tell all the world leaders to read GFY to solve the problem.

If any of you had even a small idea of what was going on here, you would not be wasting your time in the porno business and would be cleaning house on wall street. :2 cents: