De volgende golf ligt op de loer: $55 biljoen weddenschappen

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Insurance on Lehman Debt Is the Industry’s Next Test
Nearly three weeks after the Wall Street bank sank into bankruptcy, financial companies and investment funds that wrote what are effectively insurance policies on Lehman Brothers’ debts are being called on to pay hundreds of billions of dollars in claims.

Whether those claims can or will be paid, and the financial repercussions that could follow if they are not, will signify the biggest test yet for the vast, unregulated market in credit-default swaps.

The danger is that the claims on the Lehman default are so large — they are estimated at $400 billion to $600 billion — that settling them could leave some companies with large, perhaps even crippling, losses and heighten the turmoil in the financial markets.

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Derivatives: The Great Unwind
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Another guest post from MG who went from Wharton to Wall St. to real estate to Blown Mortgage.

The market was up strong yesterday. Other than the shares of bank stocks, you have to wonder why. The worldwide central bank bailout is not intended for the equity investor, or general public, or business, or you, or me. It’s intended for banks, ostensibly to spur lending, but more likely to keep them afloat through next week’s Great Derivatives Unwind. This has got to be a big part of the motivation of the CBs to provide unlimited lending to banks.

Distracted by worldwide stock market crashes, attention shifted away from Lehman’s derivatives’ payouts scheduled for October 21. Recovery value has been set at 8.625 cents per $1.00, which means that sellers of credit protection must pay 91.375 cents to the buyers (according to Creditex, the company that holds auctions).

More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. The list of participants in the auction includes Newport Beach, California-based Pacific Investment Management Co. PIMCO, manager of the world’s largest bond fund, Chicago-based hedge fund manager Citadel Investment Group LLC and AIG, the New York-based insurer taken over by the government, according to the International Swaps and Derivatives Association in New York.

According to JPMorgan, the largest foreign bank holders of Lehman’s derivatives are Deutsche Bank, Barclays, Societe Generale, UBS, Credit Suisse and Credit Agricole. Overall, as of June 30, 2008, the top ten US banks in terms of derivatives exposure were: JPMorgan Chase, Bank of America, Citibank, Wachovia, HSBC USA, Wells Fargo, Bank of New York, State Street Bank, SunTrust Bank, and PNC Bank, according to the Comptroller of the Currency Administrator of National Banks’ Quarterly Report on Bank Trading and Derivatives Activities for the second quarter of 2008. Lots of other good information too, if you like this sort of thing, as I do.

And this is just the beginning. Few losses are expected from the failed GSEs. Fannie Mae’s senior debt settled at 91.51 and subordinated debt at 99.9 cents on the dollar; Freddie Mac senior debt was 94.00 and subordinated debt was 98 cents on the dollar. Washington Mutual could be another story. It’s Credit Event Auction will settle, meaning prices will be determined, on October 23. Just last week there were credit events at the largest three Iceland banks, all of which have large quantities of derivatives outstanding. These are all financial institutions; industrials haven’t started yet.

Nonetheless, the market’s up. For technical types, Mish Shedlock has a good and almost-understandable-by-laymen explanation of where the market is in terms of Elliott Wave theory. He says, “In terms of price, given the magnitude of today’s move on top of the huge move up from Friday’s low, the rally may be 65% over already. In terms of time, the rally likely has several weeks to a couple of months to play out.” See S&P 500 Crash Count at www.globaleconomictrendanalysis.com

In my opinion, the markets are still very fragile. Charts or no charts, it wouldn’t take much to see another cliff dive. We’ll see what happens next.

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Op woensdag 15 oktober 2008 00:27 schreef beantherio het volgende:
Een echte kenner ben ik niet, maar ik vind het eigenlijk idioot dat er zoiets bestaat als een CDS. Vooral als het gaat om grotere bedrijven als Lehman dan lijkt het haast het Russisch roulette onder de verzekeringsproducten.

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Op woensdag 15 oktober 2008 00:54 schreef Drugshond het volgende:

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In zekere zin is dat ook.... niemand had een paar jaar geleden kunnen voorspelen dat banken (in relatieve economische voorspoed) wel eens failliet kunnen gaan. En toch gebeurd het...
Banken hebben risico's genomen die behoorlijk over the top gaan. Banken anno 2008 lijken in de verre verste niet op banken van voor 1990. Just another accident waiting to happen.

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Op zaterdag 4 oktober 2008 08:27 schreef Ericr het volgende:
Aegon de volgende nationalisatie dus of zal Bos geen boodschap hebben aan een omvallend verzekeringsbedrijf?

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Op woensdag 15 oktober 2008 00:27 schreef beantherio het volgende:
Een echte kenner ben ik niet, maar ik vind het eigenlijk idioot dat er zoiets bestaat als een CDS. Vooral als het gaat om grotere bedrijven als Lehman dan lijkt het haast het Russisch roulette onder de verzekeringsproducten.

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Op maandag 13 oktober 2008 20:04 schreef Tomm90 het volgende:

De boekhouding van een bank moet laten zien dat voor elke $9,- aan uitgeleend geld, zij $10,- moeten bezitten aan gestort geld. Als je het hele verhaal duidelijk wil hebben is het aan te raden een keer naar de docu kijken. Na bepaalde delen al meer dan 1 keer bekeken te hebben zijn een aantal dingen me zelf ook nog niet duidelijk

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Markets hold breath as $360bn Lehman swaps unwind

The $54trillion credit derivatives market faces a delicate test as $360bn worth of contracts on now-defaulted derivatives on Lehman Brothers are due to be settled on Tuesday.


By Louise Armitstead and Peter Koenig
Last Updated: 7:47PM BST 18 Oct 2008
Lehman Brothers' complex network of derivatives will be settled on Tuesday October 22
Lehman Brothers' complex network of derivatives will be settled on Tuesday October 22

Due to the opacity of the market, which is one of the most complex, least regulated and least understood in the global financial system, it is still not clear how many contracts have to be settled or which institutions will take the ultimate hits once the billions of dollars worth of contracts have been unravelled. The collapse of Lehman Brothers, is expected to trigger credit default swap (CDS) protection pay-outs of about $400bn but because the contracts were sold many times through different counterparties it is not yet known who will be liable.

One commentator said: “This will be the greatest illustration of the follies of Wall Street and how unnecessarily complicated the wild off-track betting became in the past few years.”

Five years ago Warren Buffett, the iconic American investor, warned that the chaotic profusion of derivatives used by companies and hedge funds to fund financial growth were “financial weapons of mass destruction.’’

Bankers in the City and on Wall Street are bracing for yet another round of turbulence as the contracts are unwound.

The Bank of England and the Federal Reserve in America have said they will keep their special liquidity windows open late on Tuesday night to allow the contracts to settle.

“We’re in unchartered waters here and it may all prove an anti-climax,” said a senior City banker on Friday, “but everyone will be watching the situation and wondering what’s going to happen.”

An earlier auction of Lehman-related derivatives on October 10 prompted early fears that banks and investors could lose $400 billion. In the event, the discounts on the Lehman-related paper that day realised losses of only $6 billion.

At the core of Tuesday’s cash exchange between banks stands a quasi-insurance product, the credit default swaps. Investors buy CDS’s to protect themselves against the possibility of default on securities issues by firms such as Lehman. During the boom years, banks’ insurers and hedge funds created and sold CDS’s to raise what appeared to be risk-free cash in the form of premium payments.

On September 16, Lehman filed for bankruptcy, leaving them obliged to payout on CDS’s written to protect investors against the possibility of a default on Lehman paper.

City bankers say that Lehman also holds a portfolio of CDS’s written to protect against other institutions defaulting and these, too, could get caught up in Tuesday’s action.

“This will arguably be the biggest cash-exchange day and somebody will fail,” one analyst warned last week.

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Op maandag 20 oktober 2008 20:20 schreef beantherio het volgende:
Wat ik me trouwens nog afvroeg: zijn die CDS-contracten op een vergelijkbare, onderdoorzichtige manier verpakt en doorverkocht als al die rotte sub prime hypotheken? Met andere woorden: krijgen we de situatie dat onwetende banken of financials hier in Europa morgen opeens een mannetje voor de deur hebben staan met de vraag "mag ik effe 10 miljard van u vangen?".

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First, if the claims are correct: Then the entire CDS game is one gigantic high-finance version of "pick pocket."

That is, you come to me for a CDS on Lehman. I charge you $100,000. Then I immediately go find someone who will sell me the same contract for $90,000. I have now "picked your pocket" to the tune of $10,000, and (theoretically anyway) I have no risk. This continues until the last sucker says "no mas!" on a cheaper price, at which point that particular chain of CDS come to a close, until the next buyer shows up.

If this is the essence of the CDS game then the entire scheme and the dealers' insistence on keeping these things off a public exchange is an artifice with intent to defraud. Why? Because by keeping bid/ask and O/I hidden these banks are able to continue to play this game of "steal from the guy you sell to by obscuring the price"; indeed, that is the essence of the trade! This market doesn't exist to make a market or to set a price for risk, it instead serves as nothing other than a high-finance looting operation with everyone putting in the maximum effort to obscure market facts so as to be able to maximally exploit the customer!

Why do I make this charge? Because there were allegedly $600 billion worth of contracts written on Lehman. If only 1% of that turns into real money needing to be paid out, and recovery on the bonds was literally under 10 cents, then the actual "notional at risk" was $540 billion. As a result we have almost none of the market being used either to insure actual bonds or to place bets on the firm's demise (or health) - essentially the entire CDS marketplace exists to do exactly one thing - steal from the buyers of this "protection"!

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Op maandag 13 oktober 2008 22:31 schreef TubewayDigital het volgende:

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het geld wordt gecreerd uti het niets maar er wordt ook gewerkt/geproduceerd dus het gecreeerde geld wordt gedekt door productie in de reeele wereld

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DTCC Addresses Misconceptions About the Credit Default Swap Market

New York, October 11, 2008 – The idea that the industry lacks a central registry for over-the-counter (OTC) credit default swaps (CDS) is grossly misleading and has resulted in inaccurate speculation on a number of matters, including the overall size of the market, its role in the mortgage crisis, and the size of potential payment obligations under credit default swaps relating to Lehman Brothers. The extent to which such speculation has fueled last week’s market turmoil is difficult to determine. The facts are these:

Central Trade Registry

* In November 2006, The Depository Trust and Clearing Corporation (DTCC) established its automated Trade Information Warehouse as the electronic central registry for credit default swaps. Since that time, the vast majority of credit default swaps traded have been registered in the Warehouse. In addition, all of the major global credit default swap dealers have registered in the Warehouse the vast majority all contracts executed among each other before that date.

Size of the Market

* Reported estimates of the size of the credit default swap market have so far been based on surveys. These surveys tend to overstate the size of the market due to each party to a trade separately reporting its own side. Thus, when two parties to a single $10 million dollar trade each report their “side” of the trade, the amount reported is $20 million, which overstates the actual size by a factor of two since both reports relate to a single $10 million contract. When examining the outstanding amount of actual contracts registered in the Warehouse (not separately reported “sides”) as of October 9, 2008, credit default swap contracts registered in the Warehouse totaled approximately $34.8 trillion (in US Dollar equivalents). This is down significantly from the approximately $44 trillion that were registered in the Warehouse at the end of April this year.

Percentage of the Market Related to Mortgages

* Less than 1% of credit default swap contracts currently registered in the Warehouse relate to particular residential mortgage-backed securities. Mortgage-related index products also have some components relating to residential mortgages and, as a whole, also constitute a relatively small fraction of total credit default swaps registered in the Warehouse.

Payment Obligations Related to the Lehman Bankruptcy

* One of the many central servicing functions of the Trade Information Warehouse is to caculate payments due on registered contracts, including cash payments due upon the occurrence of the insolvency of any company on which the contracts are written. Calculated amounts are netted on a bilateral basis, and then, for firms electing to use the service, transmitted to CLS Bank (the world’s central settlement bank for foreign exchange) where they are combined with foreign exchange settlement obligations and settled on a multi-lateral net basis. Currently, all major global credit default swap dealers use CLS Bank to settle obligations under credit default swaps. It is expected that all major institutional players in the credit default swap market will use the same process for settlement by the end of 2009.
* The payment calculations so far performed by the DTCC Trade Information Warehouse relating to the Lehman Brothers bankruptcy indicate that the net funds transfers from net sellers of protection to net buyers of protection are expected to be in the $6 billion range (in U.S. dollar equivalents).

DTCC has long supported the U.S. and global capital markets as a critical part of their operational infrastructure.We stand ready to play a constructive role in whatever overall regulatory environment ultimately emerges for the credit default swap market. We do believe, however, that whatever environment emerges should be based on assessment of the facts as they stand, rather than speculation.