disrupter
10-05-2008, 09:34 PM
60 Minutes just did a segment on Credit Default Swaps.
When you hear how this whole mess was created it is almost funny.
A 'funny' sort of horror movie? A slasher movie where everyone gets killed by the end?
These risky mortgages were made to people unlikely to be able to sustain them.
Then Wall Street hired physicists [yes i said physicists, i guess for incredible math theory skills] to combine, mix, categorize all these millions of mortgages with the theory being of reducing risk.
Then, because this mortgage paper was so complex, opaque & incomprehensible the potential buyers were naturally nervous about buying them. So the sellers also marketed Credit Default Swaps as a kind of default* insurance.
The reason Wall Street called them Credit Default Swaps & not 'insurance' is because insurance has a lot of regulations which work to make it a much more substantial product. CDSs on the other hand are only as good as the selling entity, which thus far has proved to be disastrously almost worthless.
There are estimates of between 50 to 64 Trillion dollars of Credit Default Swaps out there. But nobody knows for sure, because this all happens in the unregulated, unrecorded backrooms & alleys of Wall Street.
Virtually all these institutions that have collapsed have been big issuers of Credit Default Swaps.
I presume after they paid out a large number of settlements ['physical settlement': whole amount; 'cash settlement': difference between parity & current market value] & at some point they just had no more cash to pay of their CDSs & went belly up.
Since no one knows how many of these CDSs are out there & who owns them we won't know which institutions are [likely to be] going belly up.
Is it any wonder why everyone is afraid to lend anyone money, when they have no idea who & how deeply caught up in the Credit Default Swap mess they are? I can't even imagine that 700 billion is going to make much difference at all. Like pissing in a hurricane, it won't even be noticed.
What to Watch for:
WASHINGTON, Oct 05, 2008 /PRNewswire via COMTEX/ --
WHAT: Holders of credit default swaps -- the financial vehicles with a
worldwide face value estimated in excess of $50 trillion -- are
bracing themselves for the fallout from the Lehman Brothers
bankruptcy and the takeover of Freddie Mac and Fannie Mae by the
United States government. Three auctions to be held next week will
determine the amount of settlement payments required to be made
under credit default swaps with Fannie Mae, Freddie Mac, and Lehman
Brothers as the reference entity.
These auctions will be used to set values to be paid under thousands
of agreements and are scheduled to take place on:
Freddie Mac October 6, 2008
Fannie Mae October 6, 2008
Lehman Brothers October 10, 2008 (TBC)
WHY: After these auctions, credit protection sellers are expected to be
called upon to make payments that, in the aggregate, are
extraordinary for the credit default swap market. Some estimate that
the payments on Lehman's bonds alone will be $350 billion.http://www.marketwatch.com/news/story/trouble-ahead-massive-credit-default/story.aspx?guid=%7B9F86B14D-12F4-46DD-8C9E-FB4610D8817F%7D&dist=hppr
I am not clear if Fannie Mae &/or Freddie Mac had any direct engagement in either end of Credit Default Swaps or if it is simply that the auctions will determine the price settlements for other independent paired contracts.
in any event:
Monday Oct 6 the shit will start hitting the fan.
& Friday Oct 10, when Lehman has its auction the really hard fan shattering shit could hit.
If this is some multi trillion dollar tsunami it is hard to imagine that 700 billion dollars is going to have much effect.
My other disturbing question,
Is Paulson going to limit himself to buying up the bad mortgage paper itself?
Certainly he will not be getting involved in Credit Default Swaps will he? If he starts buying a bunch of esoteric Wall Street paper IMO he should be taken out & lined up with Bush, Cheney & Bernanke & have the four of them shot in front of the capitol.
Wiki link to Credit Default Swaps
http://en.wikipedia.org/wiki/Credit_default_swap
*default - when a borrower fails to meet the obligations of their lending/credit/mortgage contract.
When you hear how this whole mess was created it is almost funny.
A 'funny' sort of horror movie? A slasher movie where everyone gets killed by the end?
These risky mortgages were made to people unlikely to be able to sustain them.
Then Wall Street hired physicists [yes i said physicists, i guess for incredible math theory skills] to combine, mix, categorize all these millions of mortgages with the theory being of reducing risk.
Then, because this mortgage paper was so complex, opaque & incomprehensible the potential buyers were naturally nervous about buying them. So the sellers also marketed Credit Default Swaps as a kind of default* insurance.
The reason Wall Street called them Credit Default Swaps & not 'insurance' is because insurance has a lot of regulations which work to make it a much more substantial product. CDSs on the other hand are only as good as the selling entity, which thus far has proved to be disastrously almost worthless.
There are estimates of between 50 to 64 Trillion dollars of Credit Default Swaps out there. But nobody knows for sure, because this all happens in the unregulated, unrecorded backrooms & alleys of Wall Street.
Virtually all these institutions that have collapsed have been big issuers of Credit Default Swaps.
I presume after they paid out a large number of settlements ['physical settlement': whole amount; 'cash settlement': difference between parity & current market value] & at some point they just had no more cash to pay of their CDSs & went belly up.
Since no one knows how many of these CDSs are out there & who owns them we won't know which institutions are [likely to be] going belly up.
Is it any wonder why everyone is afraid to lend anyone money, when they have no idea who & how deeply caught up in the Credit Default Swap mess they are? I can't even imagine that 700 billion is going to make much difference at all. Like pissing in a hurricane, it won't even be noticed.
What to Watch for:
WASHINGTON, Oct 05, 2008 /PRNewswire via COMTEX/ --
WHAT: Holders of credit default swaps -- the financial vehicles with a
worldwide face value estimated in excess of $50 trillion -- are
bracing themselves for the fallout from the Lehman Brothers
bankruptcy and the takeover of Freddie Mac and Fannie Mae by the
United States government. Three auctions to be held next week will
determine the amount of settlement payments required to be made
under credit default swaps with Fannie Mae, Freddie Mac, and Lehman
Brothers as the reference entity.
These auctions will be used to set values to be paid under thousands
of agreements and are scheduled to take place on:
Freddie Mac October 6, 2008
Fannie Mae October 6, 2008
Lehman Brothers October 10, 2008 (TBC)
WHY: After these auctions, credit protection sellers are expected to be
called upon to make payments that, in the aggregate, are
extraordinary for the credit default swap market. Some estimate that
the payments on Lehman's bonds alone will be $350 billion.http://www.marketwatch.com/news/story/trouble-ahead-massive-credit-default/story.aspx?guid=%7B9F86B14D-12F4-46DD-8C9E-FB4610D8817F%7D&dist=hppr
I am not clear if Fannie Mae &/or Freddie Mac had any direct engagement in either end of Credit Default Swaps or if it is simply that the auctions will determine the price settlements for other independent paired contracts.
in any event:
Monday Oct 6 the shit will start hitting the fan.
& Friday Oct 10, when Lehman has its auction the really hard fan shattering shit could hit.
If this is some multi trillion dollar tsunami it is hard to imagine that 700 billion dollars is going to have much effect.
My other disturbing question,
Is Paulson going to limit himself to buying up the bad mortgage paper itself?
Certainly he will not be getting involved in Credit Default Swaps will he? If he starts buying a bunch of esoteric Wall Street paper IMO he should be taken out & lined up with Bush, Cheney & Bernanke & have the four of them shot in front of the capitol.
Wiki link to Credit Default Swaps
http://en.wikipedia.org/wiki/Credit_default_swap
*default - when a borrower fails to meet the obligations of their lending/credit/mortgage contract.