Tuesday, 14 October 2008

Lehman's CDS settlement: Viva the markets!


Guido is linking to an announcement that the net position on Lehman's might only be $6 billion. Perhaps the CDS market is efficient after all and all the fears about trillion $ losses are just hokum.

That would be nice. Does not really explain the huge margin calls being made on Hedge funds though. The problem with this net figure then is that it does not disclose individual positions. Perhaps one bank has made $200 billion and another lost $194 billion?

The final announcement is on 21st October; Plenty of volatility until then.
If there is little exposure, then rather belatedly, it shows we can let banks fail if they are bad. Just as we have bailed out all of ours.....timing is everything.

11 comments:

Pogo said...

I reckon that "Bo-Peng" hits the nail squarely on the bonce with his summary:-

"The important thing is for the government and the market not to be fooled into a false sense of complacency by this press release. The logjam in worldwide financial markets for the past few weeks is because of the Lehman CDS settlement. Banks know how much they're liable for. But they don't know how much others are, including their hedge fund clients.

Unless government forces disclosure on Lehman settlement exposure, we can only assume the worst -- another bank or two going down and propagating the chain reaction. The opacity has been the single most important reason why the inter-bank market has seized up and hedge funds have been forced to liquidate by the double whammy of prime brokerage margin calls and investor withdrawal.

Government must take the pending storm seriously and force all financial institutes to disclose their net liability or windfall on 10/21. For those with huge liability and whose failures are likely to cause chain reaction, the government must provide immediate backing -- buy preferred stock or force debt-to-equity conversion -- so that it's clear to everyone that the chain reaction will be stopped."


Frankly, considering the amount of government involvement in the financial markets at the moment, demanding disclosure could be considered to be a drop in the ocean in terms of "interference" but could be the biggest contributor to getting the whole sorry mess back on a relatively even keel.

CityUnslicker said...

disclosure to the market is a good thing. More info helps set prices correctly. You are right

Pogo said...

IMHO, disclosure would only be efficacious if the props were already in place to support the institutions that are going to "take a bath"... Otherwise, the markets will go back into "headless chicken" mode again.

Mark Wadsworth said...

This whole CDS issue has been hammed up by subsidy-seeking banks. The net position is of course a big fat zero. As to margin calls on hedge funds, they are usually at the end of the line when it comes to accepting/bearing risk (I don't think anybody goes long or short of hedge funds, for example).

Hedge fund investors are the richest and stupidest of all, if they win, good for them, if they lose, so what?

Furthermore, all these CDS deals are already recorded by the DTCC and could be unwound relatively painlessly.

Pogo said...

Mark Wadsworth said...

"This whole CDS issue has been hammed up by subsidy-seeking banks. The net position is of course a big fat zero."

That's true, but in the course of netting-off there are going to be some winners and some losers - and if any of the losers "lose big", in the present hysterical state of the market, everybody cops it!

Hence the proposal that the props be in place before the general announcement.

Mark Wadsworth said...

Pogo:

if any of the losers "lose big"... they'll just have to do a debt-for-equity swap!

And even if the loser of a particular bet goes bankrupt (highly unlikely, if we take 'bankruptcy' to mean that not only shareholders but bondholders would get wiped out), this reduces the net transfer as the winning party just wins less than it was hoping!

Pogo said...

Mark...

Anyone for dominoes? :-)

CityUnslicker said...

Mark you really hate shareholders it seems to me....
personally, I have less time for bondholders as us serfs are not allowed to play in that game yet get screwed by it.

Mark Wadsworth said...

Who says I hate shareholders? Well apart from you, of course.

I do not begrudge them their profits in good times (part of my cunning overall manifesto is to get rid of higher rate tax, capital gains tax and Stamp Duty, don't forget) and they get no sympathy from me in bad times.

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