Oct21 - Lehman CDS bombs set to detonate

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Subject Author Date Oct21 - Lehman CDS bombs set to detonate Mr Bubble 10-17-2008  Re: Oct21 - Lehman CDS bombs set to detonate Mr Bubble 10-17-2008  Re: Oct21 - Lehman CDS bombs set to detonate BuffetHater 10-17-2008  Re: Oct21 - Lehman CDS bombs set to detonate John Galt 10-17-2008
Posted by Mr Bubble on October 17, 2008, 4:33 pm http://www.bloggingstocks.com/2008/10/15/will-lehman-bankruptcy-drop-400- billion-shoe-on-october-21st Will Lehman bankruptcy drop a $400 billion shoe on October 21st? Posted Oct 15th 2008 10:20AM by Peter Cohan The financial crisis is not over. If things were back to normal, banks would be lending to each other and to businesses and individuals. But measures of bank lending risk suggest fear is 12 times as high as it would be in normal times. The reason? Banks know more than you do about what's wrong. And they're not talking about it because they don't want you to withdraw your deposits and sell your stock. What they know is that on October 21st, some of the biggest players on Wall Street could be required to come up with $400 billion that some may not be able to pay. Last month, the White House decided that we could afford to let Lehman Brothers file for bankruptcy. That proved to be an enormous mistake. It triggered a run on money market funds because one of the oldest such funds, Reserve Primary, broke the buck since it held Lehman Brothers paper. The U.S. responded with a $50 billion guarantee of money market funds. But the biggest consequence of that mistake is in the $54.6 trillion market for Credit Default Swaps (CDSs). A CDS is like selling insurance on your car to hundreds of people who don't own it -- yet if your car goes up in flames each of those people collects the full value of your car. More specifically, CDSs are insurance against a bond or loan default. Why are CDSs so dangerous? Three reasons: a CDS seller does not need to put any capital aside to cover losses if the security defaults, the buyer doesn't need to own the asset it wants to protect, and there is no central place where information about all these CDS deals is collected and updated. Surely our biggest financial institutions would shun such risky contracts, right? Wrong. Thanks to $16 billion in CDS insurance premiums over the last two years, three of the largest banks on Wall Street -- JPMorgan Chase (NYSE: JPM), Citigroup Inc. (NYSE: C) and Bank of America (NYSE: BAC) -- control 92% of the CDS market. For years, those CDS premiums were almost pure profit. But the financial crisis has changed all that. Imagine that 100 firms had accepted a CDS contract to guarantee payment on a $1 billion bond and then the bond issuer entered bankruptcy and stopped making payments. That would mean that the recipients of those CDS premiums would need to pay up. Following the burning car analogy, the CDS policyholder would get $100 billion (while oversimplified, this example calculates the $100 billion figure by multiplying the 100 insurers by the $1 billion bond amount). But the CDS market does not require those 100 firms to hold any capital in reserve in case they have to pay off their bet. And if they don't have the money to fulfill their obligations, one option is a bankruptcy filing. This comes to mind in considering how Lehman's bankruptcy could spur a system wide collapse. On October 21st, the settlement of Lehman CDSs will be announced and it could involve payments of between $100 billion and $400 billion. One of the biggest payers will be American International Group (NYSE: AIG) which is now famous for taking $122.8 billion of our money and enjoying plush retreats. But there are others -- such as hedge funds and investment banks -- which are also likely to be on the hook. Fear of what will happen on October 21st is keeping the credit markets frozen. If you're wondering how this situation ever arose in the first place, you don't have to look all that far. In 2000, John McCain's chief economic advisor, Phil "Americans are Whiners" Gramm, deregulated the CDS market. Posted by Mr Bubble on October 17, 2008, 4:53 pm aeronaut@flight.net wrote in > On Fri, 17 Oct 2008 20:33:51 +0000 (UTC), Mr Bubble > > >> >>But there are others -- such as hedge funds and investment banks -- >>which are also likely to be on the hook. Fear of what will happen on >>October 21st is keeping the credit markets frozen. > > They're obviously trying to build a massive buffer to offset this, and > have succeeded in preventing this laughable "market" from probing into > 7K territory... > > As I said before, I can't wait until these fraudulent "gains" get > regurgitated in "investors" faces... > the Fed must have the chesk written already, as there shows some Credit market thaw in the TED Spread reversal ? : http://www.bloomberg.com/apps/quote?ticker=.TEDSP:IND Posted by BuffetHater on October 17, 2008, 4:57 pm "They" also claim this has long been a given and reserves have been put aside against these losses. Next? Huge CDS o/s to oil producers. You can say Chavez is having a bad day, but when you owe the bank a hundred grand, you got a big problem, when you owe the bank several hundred mill, you get bailed out as the bank has the problem. Really getting the feel that "unintended consequences" of every single little thing bush, ben-yakki and paulson do will be our demise. Low dollar, lower interest rates = oil and commods spike Commod bubble popping = Stock market plunge and recession in china caught with huge stockpiles of material no one needs or wants TARP = new bubbles in the making, perhaps gold, won't be realty or stox as no end users to dump on and every bubble needs a way to rip off the public. Hello $15,000 gold and $500 silver and line ups to buy coins or ingots. Posted by John Galt on October 17, 2008, 6:05 pm Mr Bubble wrote: > http://www.bloggingstocks.com/2008/10/15/will-lehman-bankruptcy-drop-400- > billion-shoe-on-october-21st > > > Will Lehman bankruptcy drop a $400 billion shoe on October 21st? > > Posted Oct 15th 2008 10:20AM by Peter Cohan > > > The financial crisis is not over. If things were back to normal, banks > would be lending to each other and to businesses and individuals. But > measures of bank lending risk suggest fear is 12 times as high as it > would be in normal times. The reason? Banks know more than you do about > what's wrong. And they're not talking about it because they don't want > you to withdraw your deposits and sell your stock. What they know is that > on October 21st, some of the biggest players on Wall Street could be > required to come up with $400 billion that some may not be able to pay. > > Last month, the White House decided that we could afford to let Lehman > Brothers file for bankruptcy. That proved to be an enormous mistake. It > triggered a run on money market funds because one of the oldest such > funds, Reserve Primary, broke the buck since it held Lehman Brothers > paper. The U.S. responded with a $50 billion guarantee of money market > funds. But the biggest consequence of that mistake is in the $54.6 > trillion market for Credit Default Swaps (CDSs). > > A CDS is like selling insurance on your car to hundreds of people who > don't own it -- yet if your car goes up in flames each of those people > collects the full value of your car. More specifically, CDSs are > insurance against a bond or loan default. Why are CDSs so dangerous? > Three reasons: a CDS seller does not need to put any capital aside to > cover losses if the security defaults, the buyer doesn't need to own the > asset it wants to protect, and there is no central place where > information about all these CDS deals is collected and updated. > > Surely our biggest financial institutions would shun such risky > contracts, right? Wrong. Thanks to $16 billion in CDS insurance premiums > over the last two years, three of the largest banks on Wall Street -- > JPMorgan Chase (NYSE: JPM), Citigroup Inc. (NYSE: C) and Bank of America > (NYSE: BAC) -- control 92% of the CDS market. For years, those CDS > premiums were almost pure profit. But the financial crisis has changed > all that. > > Imagine that 100 firms had accepted a CDS contract to guarantee payment > on a $1 billion bond and then the bond issuer entered bankruptcy and > stopped making payments. That would mean that the recipients of those CDS > premiums would need to pay up. Following the burning car analogy, the CDS > policyholder would get $100 billion (while oversimplified, this example > calculates the $100 billion figure by multiplying the 100 insurers by the > $1 billion bond amount). But the CDS market does not require those 100 > firms to hold any capital in reserve in case they have to pay off their > bet. And if they don't have the money to fulfill their obligations, one > option is a bankruptcy filing. > > This comes to mind in considering how Lehman's bankruptcy could spur a > system wide collapse. On October 21st, the settlement of Lehman CDSs will > be announced and it could involve payments of between $100 billion and > $400 billion. One of the biggest payers will be American International > Group (NYSE: AIG) which is now famous for taking $122.8 billion of our > money and enjoying plush retreats. > > But there are others -- such as hedge funds and investment banks -- which > are also likely to be on the hook. Fear of what will happen on October > 21st is keeping the credit markets frozen. > > If you're wondering how this situation ever arose in the first place, you > don't have to look all that far. In 2000, John McCain's chief economic > advisor, Phil "Americans are Whiners" Gramm, deregulated the CDS market. If I'm not mistaken, this is inaccurate. The CDS market was never regulated. http://www.portfolio.com/interactive-features/2008/10/Timeline-of-Derivatives-Market JG Similar Threads Posted U.S. to sell Israel Air Force new bunker-buster bombs September 13, 2008, 8:07 pm Re: Lehman Brothers September 25, 2008, 9:21 am Re: Lehman Brothers September 25, 2008, 9:24 am LEHMAN starting to sink. 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