tulip to hit the fan in US today (again, maybe)

[Moscow Mule]

http://www.order-order.com/2008/10/j...ion-today.html

Fans of my previous postings on CDSs (es'?) will remember the concerns I had on this sometime ago. The Auction for the Lehman wind up is going on today (in the US).

I don't think any banks will fail on this (the gross exposure is close to $400 billion, but nets will be much less) but it could be a reason for the continued volatility this week.

[BrilloPad]

http://www.telegraph.co.uk/finance/c...t-markets.html

Fears of Lehman's CDS derivatives haunt markets
It is a full week after bankers gathered in New York to start sorting out the derivatives mess left by the bankruptcy of Lehman Brothers. We still do not know who is on the hook for some $360bn of default insurance, or how much they will have to pay.

Ominous talk of big names and big sums continues to haunt global markets, thwarting efforts by the US and European authorities to unlock inter-bank lending. Traders have noted with acute interest that insurer AIG - now nationalised - says it will need another $38bn from the US government, on top of the $85bn bail-out it has already received. AIG is the world's biggest underwriter of credit protection.

Those on the wrong side of these Lehman debt contracts - known as credit default swaps (CDS) - must come up with the money by Tuesday, the next D-Day in the ever-fraught calendar of the credit markets. There has been a deafening silence so far.

There is no easy way of finding out who they are, so every bank and insurer is suspect. The $55,000bn CDS market is "completely lacking in transparency and completely unregulated" in the words of Chris Cox, the chairman of the US Securities and Exchange Commission.

The settlement auction on Lehman CDS contracts last week was in itself a bombshell. Creditors retrieved just nine cents on the dollar from the Lehman wreckage. As Naked Capitalism put it, the bank had "vaporised". The biggest players at the auction were Goldman Sachs and Deutsche Bank but they were almost certainly transacting for clients.

The insurers of the debt -- a third are hedge funds -- will have to pay 91pc of the $400bn in contracts.

The Depository Trust and Clearing Corporation says the risks have been exaggerated in headline scare stories, insisting that the total sum to be paid will be closer to $6bn. It says most positions are "netted out".

"That's not credible," says Andrea Cicione, credit chief at BNP Paribas.

"They keep coming up with these number by 'netting' but we think the amount is going to anywhere from $220bn to $270bn. The chain broke in the CDS market when Lehman Brothers went down. We may now see other counter-parties defaulting," he said.

With hindsight, it is now clear the decision to let Lehman Brothers go bankrupt set off a melt-down of the world financial system, forcing North America, Britain, Europe, Australia, and now parts of Asia to rescue their banks. "A dramatic error," said Christine Lagarde, France's finance minister.

US Federal Reserve chair Ben Bernanke said this week that Washington lacked the legal power to take on the vast liabilties stemming from a Lehman rescue.

"A public-sector solution for Lehman proved infeasible, as the firm could not post sufficient collateral to provide reasonable assurance that a loan from the Federal Reserve would be repaid, and the Treasury did not have the authority to absorb billions of dollars of expected losses to facilitate Lehman's acquisition by another firm. Consequently, little could be done," he said. The new legislation passed by Congress "will give us better choices."

In truth, both Congress and the US public wanted a scalp. Treasury Secretary Hank Paulson had to bide his time until it was clear to almost everybody that a domino collapse of the US banking system would lead to catastrophe. The Lehman collapse did the trick.

The list of companies admitting to losses on Lehman investments reveals the global extent of the damage. Dexia held €500m of bonds, which may have caused its own need for a Franco-Belgian rescue days later.

Among the others with declared exposure: Swedbank $1.2bn; Freddie Mac $1.2bn; State Street $1bn; Allianz €400m; BNP Paribas €400m; AXA €300m; Intesa Sanpaolo €260m; Raffeissen Bank €252m; Unicredit €120m; ING €100m; Danske Bank $100m; Aviva £270m; Australia and New Zealand Bank $120m; Mistubishi $235m; China Citic Bank $76m; China Construction Bank $191m, Industrial Commercial Bank of China $152m and Bank of China $76m. Ultimately, some money may be recovered.

These losses are out in the open, but the CDS shoe has yet to drop. Perversely the insured volume is greater than the $150bn total of Lehman debt. Some $400bn of CDS contracts were sold. Many were used by hedge funds to take "short" bets on the fate of the bank. The contracts nevertheless have to be honoured.

Chris Whalen, head of Institutional Risk Analytics, says this creates a huge moral dilemna. Why should taxpayers now responsible for AIG foot the bill for huge windfall transfers to hedge funds?

"We need to shut this whole thing down. The people who don't own the underlying collateral and were just betting should be flushed away. It would be grotesque if the US authorities were now to subsidize speculators. The US political class is waking up to this," he said.

If so, the winners may have more trouble than they realize collecting their prize.

[Moscow Mule]

"We need to shut this whole thing down. The people who don't own the underlying collateral and were just betting should be flushed away.

Naughty naughty. This is why the CDS market was so big, and so dangerous.

[ThomasSoerensen]

This one is going to be interesting to follow.

[DiscoStu]

If it goes smoothly we could be looking at a monster relief rally...

Time for a little spread bet?

[BrilloPad]

http://business.timesonline.co.uk/to...cle4974438.ece

Banks braced for Lehman Brother's debt insurers' deadline

Financiers enjoying a respite from the panic of the past few weeks should brace themselves for further mayhem tomorrow, the deadline for insurers of Lehman Brothers' debt to pay up on billions of dollars of policies.

Last week, these borrowings were deemed to be worth only 9.75 cents on the dollar. There are about $400 billion (£231 billion) worth of insurance contracts — known as credit default swaps, or CDSs — written on Lehman's debt, leaving the underwriters on the hook for about $360 billion. Fears are mounting that billions of dollars of insurance will go unpaid and that dozens of financial groups will go under because of Lehman's demise.

Groups such as the Deposit Trust and Clearing Corporation (DTCC) argue that many insurers have hedged their exposure effectively and estimate that the “net settlement”, after hedging, will amount to only about $6 billion.

Robert Pickel, chief executive of the International Swaps and Derivatives Association, said: “People have been monitoring these positions on a daily basis and have been hedging against their exposure. I don't think at this point there's any unexpected loss or unexpected payment.”

However, Hugh Johnson, head of Johnson Illington, an American fund manager, said: “I hope the $6 billion estimate is correct — that would be a real gift — but I don't believe anybody really has a good handle on the size of the net settlement. I have heard a range of $2 billion to $300 billion and have no idea what it is.” Mr Johnson said that “significant net settlement figures” could require further government intervention and may force down financial shares as investors fret about exposure to CDS contracts.

Part of the problem, experts say, is that the underwriters sold the policies on and nobody really knows who will be on the hook for the Lehman debt, by how much or whether they will be able to pay up.

Any large hits are likely to leak out soon. About 350 banks and investors are thought to have taken on CDS contracts, of which hedge funds hold about a third. Some institutions have already declared their exposure. These include Freddie Mac and Swedbank, with $1.2 billion apiece, and State Street, with $1 billion. Of greater interest will be the exposure of the hedge funds and whether they can pay.

[rootsnall]

The market doesn't agree with you, up at the moment, but that can change fast !

Quite a few 'legendary' investors have been buying shares in the past week

[BrilloPad]

The market doesn't agree with you, up at the moment, but that can change fast !

Quite a few 'legendary' investors have been buying shares in the past week

I hope the market is right.

[Cyberman]

They are buying because cash is just not safe at the moment.

[ace00]

...

Quite a few 'legendary' investors have been buying shares in the past week

Yes I have - how did you know?