Posted by guest , Oct 11, 2008 3:12PM

Please stop talking about this. This is a virtual non-issue. Its just a final settlement procedure for the CDS contract, which has happened several times before.

Any hits to outstanding Net Sellers of protection took place the day after Lehman defaulted (and every subsequent day) as CDS is an OTC contract and margin'd daily.

Posted by guest , Oct 11, 2008 3:15PM

I think EP keeps bringing this up because there is something we are missing.

Posted by guest , Oct 11, 2008 3:20PM

The counterparties have all already posted collateral. Lehman debt has been trading at 10 to 13 cents for a while. Collateral has already been posted based on this, so this is not a bid deal. Nothing to see here, move on.

Posted by guest , Oct 11, 2008 3:25PM

Has anybody seen this theory that Huckabee mentioned on Fox News about the market being manipulated for political purposes? (http://hotair.com/archives/2008/10/11/economic-terrorism-huckabee-wonders-if-someones-trying-to-drive-the-market-down/) Would it be possible for Soros or Putin or China ect. to engineer last week's market declines via a bear raid?

Posted by guest , Oct 11, 2008 3:32PM

@8

Just posing a question. I do think it seems far-fetched, but I only have an undergrad degree in economics and don't work on Wall Street. Figured commenters on here would be in a position to provide more informed commentary.

Posted by guest , Oct 11, 2008 3:32PM

#8. This morning Kudlow said it could be our OWN hedge funds.

Posted by guest , Oct 11, 2008 3:35PM

#8, it isn't just the "wingnut blogs" where this is being discussed. All the blogs from the cable channels, including CNBC are having discussions like this.

I mean, some are even thinking the dems have engineered this so that it greases the skids for a democratic presidency.

They are almost going to have to address this or it will take on a life of its own.

Posted by guest , Oct 11, 2008 3:36PM

Re #8 That would make own OWN hedge funds trrrrst evil-doers, and Kudlow a trrrrrs evil-doer by association.

Posted by guest , Oct 11, 2008 3:36PM

@3 .. there is nothing that is missing. all this talk started wed/thurs in the blogosphere to try to explain why the market has been shtting itself (I guess the market has to have a reason to go down other than a horrible economy and worst credit crisis in a century??). If there were any effects, then you would have seen this day 1 and then in subsequent days as debt traded down from 30 to 9cents.

The bigger issue in all of this that everyone seems to be missing is the recovery that lehman counterparties (not CDS holders) will receive after all of their contracts were wiped clean. Ie. If i had made 100mm buying CDS protection on GM from lehman, and did not unwind that contract, my claim is now worth:

Lehman ultimate recovery (which could be higher or lower than the auction) * 100mm. which I may or may not be able to fully recover when leh bankruptcy is finally resolved (2 - 3 yrs???)

Posted by guest , Oct 11, 2008 3:45PM

"Obama fundraiser, convicted of fraud, spills beans
Oct 11, 3:47 AM (ET)
By MIKE ROBINSON

CHICAGO (AP) - Jailed political fundraiser Antoin "Tony" Rezko, the Chicago real estate developer who helped launch Barack Obama on his political career, is whispering secrets to federal prosecutors about corruption in Illinois and the political fallout could be explosive."
http://tinyurl.com/3zqg24

Posted by guest , Oct 11, 2008 3:54PM

@6, @9, @10

This isn't an assault, or raping, or anything organized by any one person or group of people. It's a lack of buyers coupled with the deflation of a bubble (in the equity markets).

The real problem lies in the debt markets, but because the American consumer doesn't know the difference, (s)he's taking it out on who ever (s)he can find.

-phobos.

Posted by guest , Oct 11, 2008 4:08PM

Come on! The CDS will settle just fine. Like the previous posters have said, the counterparties have already posted sufficient collateral. It's fine damn it. Nobody will default (although i hope some jerk would choose to default rather than taking a huge hit that he can afford)

Posted by guest , Oct 11, 2008 5:02PM

From the article: "One market participant said there is a strong likelihood somewhere along the chain that Lehman itself was buying or selling protection against itself, often through extremely complex trades, meaning an unlucky counterparty might not be reimbursed after final settlement."

LOL. But I don't think "unlucky" is the word we're looking for here...

Posted by guest , Oct 11, 2008 5:42PM

@11 what the hell does any of that have to do with democrats or republicans? you are a wingnut.

Posted by guest , Oct 11, 2008 5:46PM

Here's the one (1) thing we KNOW about the Lehman CDS settlement: Nothing.

We do not know who owes, who is owed, what is owed, or for what amount they'll settle.

It is quite likely we will never know.

However, if it puts your mind at ease, neither $400bn or any sum of money even remotely close to that figure will actually change hands.

The auction served to determine a technical factor required for settlement, but whether it is $0.09 or $0.10 or $0.13 is largely irrelevant to the actual payout the parties will ultimately agree upon (out of court).

Posted by guest , Oct 11, 2008 6:03PM

The main concern here is that since CDS are not done on a central exchange, hedge funds could have sold the CDS through dealer A, then dealer B, then dealer C, and D. As the bonds declined, they may have posted collateral, but only once, pointing the different dealers to the same pot of dough, while they hoped Lehman would skate through. Now, they have to come up with the money. The CDS market is the Wild West. Morningstar had a decent interview / video on their site talking about this. I'm assuming that's how you get $400b of CDS on $100b of debt, but please, correct me if I'm wrong. The amazing thing is, there are a ton of smart people on this site, and very, very few of us know much about the CDS market. Kind of tells you something in itself.

~J

Posted by guest , Oct 11, 2008 6:14PM

#20. The Fast Money Guys have been trying to figure this out for a week. They are all successful so they finally have just resorted to begging, literally beginning for transparency. They are trying to get them to put everything on exchanges and have it all out there. You have definitely hit on the crux of the matter. No one wants to try to explain something they don't understand. I'm beginning to wonder if the guys who originally designed this stuff even understand it or if everything simply just morphed out of control. Hence the reason for Kashikari, he is an engineer and what he and his group will do is try to reverse engineer all this stuff and hope in the end that they understand it. For me, the fast money guys have a better idea. Reverse engineering could quite literally take years.

Posted by guest , Oct 11, 2008 6:19PM

In second grade I was Chewbaca for Halloween, along with five other kids.

SPODE

Posted by guest , Oct 11, 2008 6:24PM

Is this what Monday has in store??

http://upzero.com

Posted by guest , Oct 11, 2008 6:45PM

This whole thing is going to hell in a hand basket. The CDS stuff will be the final nail in the coffin. If you dill weeds don't think this is serious, you deserve to crash & burn.
What the hell, you'll all crash and burn anyway....perhaps is does not make any difference...Here in the Promised Land; we're awaiting your demise.

The Other Guy from Delaware

Posted by guest , Oct 11, 2008 6:57PM

the lehamn cds stuff being old news is why jerkoffs who went short 10 minutes into trading friday lost their assets...but keep playing

Posted by guest , Oct 11, 2008 6:58PM

Posting collateral = problem solved requires as a precondition that the collateral was actually sufficient to meet the obligations.

Again, you can do whatever the hell you want with CDS, it's entirely unregulated and secret, so it's entirely possible that someone won't be able to cover.

I don't think any particular important entity would have screwed up enough to suddenly be insolvent, but people could take hits, and dumbasses (hedge funds) could blow up.

Posted by guest , Oct 11, 2008 7:00PM

#20. If I am a 500mm hedge fund, and lets say that I only have one trade, which I sold 1bn of LEH CDS, 250mm to Dealer A,B,C,D as you suggest and put up initial margin of 5% and then 'variation' margin everyday as I lost more and more money on the trade.

Lehman defaults, I now owe dealer A,B,C,D 225mm minus the amount of variation margin I posted to each (assuming the CDS trades at 90).

So, they each come and collect the money that night through the prime broker arrangement, only problem is i have 500mm of capital. So they put me in default and take all my money and they take a haircut on the amount of money they thought they were due.

This happened the day after Lehman filed, so we would have already heard of funds that were blown up due to the trade.

I do agree it is scary that no one understands the CDS market and this caused any sort of concern on Friday, etc...

but the main issue with CDS, is not this scenario on just one company defaulting. It's the fact that if a counterparty like Lehman defaults, all the derivative contracts it wrote, CDS/IR Swaps/OTC derivatives, are null and void, leaving their counterparties with risk exposure where they thought there was no exposure, that has to go out and be replaced.

This is the reason why AIG was saved, it had written 400bn of CDS protection through structured credit vehicles to banks, etc, and had they defaulted, banks would have lost any money they made on the trade plus had to go out and replace the trades elsewhere. AIG was acting as a big hedge fund, so where there are other hedge funds with massive CDS exposure that is all one way (ie. sellers) that poses a systemic risk.

Posted by guest , Oct 11, 2008 8:05PM

27: I've seen docs of CDO vehicles that sold CDS contracts with 5% collateral but no variation margin - it's all cash settled upon termination of the trade. With the filing of the LEH counterparties and guarantors, the trades have terminated. If the GICs don't cover the lossess there will be cash calls on AAA tranches. Even if the GICs do cover the losses, someone's CDO paper just went to zero... which means write-downs and looming recapitalizations. Would that all CDS trades were structured with margin calls... sad reality is that there are blowups coming. Big ones.

Posted by guest , Oct 11, 2008 8:53PM

Don't worry, lads, it's all about "netting"....

Posted by guest , Oct 11, 2008 10:04PM

If there's no regulatory body to sanction me, why shouldn't I first stonewall and eventually default on all CDS "obligations"?

Posted by guest , Oct 11, 2008 10:07PM

You know if we were reading about this in a novel we would say that the author had "quite and imagination". The more I read, the more I think they really need a posse from Vegas. Them boys would be able to figure this out. Forget Kashakari, you need vegas and you need them yesterday.

Posted by guest , Oct 11, 2008 11:17PM

That same year my mom dressed up as Princes Leia. I think that was the beginning of my Oedipus complex.

If I had only known not to use my house as an ATM machine. If I had only known. Wisdom is a dreadful thing when it bringeth no profit unto its possessor

SPODE

Posted by guest , Oct 11, 2008 11:23PM

... ....
.. ...

Posted by guest , Oct 11, 2008 11:40PM

SPODE, it's not as though everyone else wasn't doing it. I know, I know, that question keeps going through my mind too:

Q: "what possessed you, if everyone is jumping off a bridge are you going to jump off too?"

A: "No Mom, but...."

Posted by guest , Oct 12, 2008 12:17AM

@36

Your mom dressed up as Princes Leia too?

SPODE

Posted by guest , Oct 12, 2008 12:37AM

suspend the contract clause. all CDS null and void.

Posted by guest , Oct 12, 2008 1:02AM

#37. Irony of ironies she did and my dad was Luke Skywalker. (my dad almost didn't make it into the costume and my mom threatened him with making him wear her stomach flattner All of us kids still laugh about that night, was like watching a comedy but with your parents.)

Posted by guest , Oct 12, 2008 1:02AM

Even with var margin, you still have value at risk - specifically whatever the margin rate is.

Not to mention, what was posted as collateral?

"AAA" CDO's perhapes, LOL.

Posted by guest , Oct 12, 2008 1:18AM

31: The regulatory body in this case is known as the civil court system. It's a contract. You broke it. Admittedly courts can't do bans on trading, revoke licenses, etc, like the Gweat and Tewwible SEC, but they can sure as Hell stick your ass for the money plus interest and costs.

38: Doesn't help. Just rebounds the default onto the original counterparty. You may claim they "deserve" it more (but at least they bought insurance, eh?) Still sucks liquidity out of the system. In my opinion, CDS originator "deserves" the hit more than either original party because they were dumb enough to issue it!

Liquidity is a zero-sum game unless something outside the system you're looking at injects more into it. In actual fact, only governments can *really* "inject" liquidity. Everybody else just moves it around.

Posted by guest , Oct 12, 2008 2:41AM

did we know this already?:

"Wells Fargo & Co. (WFC:US): The lender's credit rating may be cut by Moody's Investors Service because of increased risk the company faces in acquiring Wachovia Corp. (WB:US). The stock rose 3.9 percent to $28.31 in regular trading."
http://tinyurl.com/3mne9u

Posted by guest , Oct 12, 2008 2:54AM

"The Icelandic banks that failed this week were also often included in CDOs created during 2006 and 2007, according to Sivan Mahadevan, a New York-based Morgan Stanley strategist."
http://tinyurl.com/4rovc3

Posted by guest , Oct 12, 2008 5:48AM

i cannot believe (no, wait i actually can in shock) that CDS spreads for some BBB or BBB- companies can be 430+ when they were <100 in january.

Dow is over 11 by the end of the week...calling it here first (bold)

GM and F aren't going anywhere

Posted by guest , Oct 12, 2008 6:50AM

2 and 5 have it. Nothing to see here. The level of ignorance displayed here is just stupendous. The press don't help because they don't get it either, but because they whip it up into a big deal, it becomes one. Maybe the industry should be better at education.

And EP, you don't do your own credibility any favors by saying that Lehman itself may be one of the counterparties to CDS on Lehman. First, that would have required Lehman to have been selling protection on itself (theoretically not impossible but it wouldn't have been doing it through the regular CDS market and it's highly highly unlikely that they would have done it at all). Secondly, that would assume that counterparties facing Lehman on those trades wouldn't have closed them out as soon as Lehman filed for Ch. 11. So, *if* you did a self-referenced CDS with Lehman *and* you didn't close that out when Lehman defaulted then you could be facing Lehman for a payout I guess. But frankly, if you allowed yourself to get into that position you are criminally negligent and you deserve whatever's coming your way. Economic Darwinism at work.

Posted by guest , Oct 12, 2008 6:54AM

Just to add, Lehman would have been a counterparty on other CDS, such as Fannie Mae and Freddie Mac, WaMu etc. But those trades will have been closed out that the time Lehman filed, marked to market and netted against other trades that each counterparty had with Lehman.

Posted by guest , Oct 12, 2008 7:40AM

@45/46

Pardon my ignorance. I'm a delaware boy.

How do you actually close the outstanding trades?

Eg. I bought a CDS on WaMu from Lehman.

WaMu & Lehman went bankrupt simultaneously. So I should now collect my CDS payout from Lehman. But since they are bankrupt, would they actually make the payout or must i wait for the courts to distribute the payout to me (if any)?

If Lehman won't pay out, then how do I actually close out?

The Guy from Delaware

Posted by guest , Oct 12, 2008 8:13AM

@47 Delaware boy.

Lehman filed first. About a week earlier. So you would have immediately closed out your whole derivatives book with Lehman (i.e your WaMu CDS, any other CDS and any other derivatives you had with them). You would have calculated the mark-to-market value of all those terminated trades. You'd have been in the money on the WaMu trade but maybe out of the money on others, and you'd have netted them down to one net claim from (or payable to) Lehman. Then if you were net in the money you would have applied the collateral that you were holding, that you would have been calling for as your net position got more in the money.

You did take collateral, right?

For any excess over the amount of collateral you held you're an unsecured creditor. But if you weren't fully collateralized that must be because your credit folks down there in Delaware took the decision that you didn't need to be. And as Lehman's financial condition declined (which didn't happen overnight) your accounting folks down there in Delaware were taking reserves against your exposure so that when they finally did crumble it don't come as like a big surprise.

Some people closed Lehman out and owed them money, which they paid.

So I'm not saying that people don't have exposure to Lehman in the CDS market, or other derivtives markets. They do. But that's a net exposure across their whole book and in most cases is collateralized and already accounted for. So this $400m hit that even supposedly knowledgeable reporters are mentioning just isn't going to happen. And as someone else further up said, if there are hits they've already happened.

Posted by guest , Oct 12, 2008 8:19AM

check out the bankruptcy code provisions written especially for swaps and derivatives. They are "safe harbors" from the automatic stay (meaning lehman's estate has to pay you).

Posted by guest , Oct 12, 2008 8:28AM

One more point @47 Delaware boy, to fix a misconception that someone else had. The collateral that derivatives counterparties took from Lehman would have been G7 cash and US Treasuries or similar, not flaky CDOs or ABS.

@49: the safe harbors mean that you can terminate, close out and apply collateral. They don't put you ahead of Lehman's other unsecured creditors for your claim.

Posted by guest , Oct 12, 2008 9:34AM

Any opinions on Mitsui Fudosan? Any sign of real stress there on the credit market?

Posted by guest , Oct 12, 2008 10:30AM

number 48 framed the issue correctly. everyone is 30days behind the problem. the real carnage happened the day that lehman filed for bankruptcy and you found out whether you had your risky pnl trapped there or not... this is just a settlemnt issue.

Posted by guest , Oct 12, 2008 12:21PM

This is like arguing about how many fairies can dance on the head of a pin.

Posted by guest , Oct 12, 2008 1:14PM

@41 but even then it's still just moving it around, becuase what you are intimating is that the govt can print money. which causes inflation, not wealth creation

Posted by guest , Oct 12, 2008 1:55PM

Liquidity has nothing to do with wealth or its creation. Liquidity is simply money or other liquid assets available for use. When you look at the entire financial system, only a government can create liquidity where there is none, because they can print money and lend it or give it away. Is that a good thing? Oh Hell no. But they can do it.

Nobody else can create it. If they have some, they can use it- which can in turn enable somebody else to use it again, etc. If they don't have any, and nobody else will decrease theirs to increase the non-liquid party's liquidity, there's nothing they can do. As I said, it's a zero sum game. For anybody but a government to get more liquid, somebody else has to get less liquid.

Posted by guest , Oct 12, 2008 2:36PM

#56. So we essentially have "check mate" in the credit markets?

Posted by guest , Oct 12, 2008 5:03PM

@53 - finally some good sense!

Posted by guest , Oct 12, 2008 5:40PM

So, the "net" result of all this is we'll know Tuesday who's right.