Will this cause another meltdown next week? http://www.businessweek.com/investor/content/oct2008/pi20081011_802481.htm “The auction on Oct. 10 of more than $400 billion worth of Lehman Brothers’ credit default swaps has revealed a little of how the market will value these products. The Lehman swaps ended up being pricing at 8.625 cents on the dollar, below the initial estimate of 9.75 cents on the dollar earlier that morning and well below the 12 to 13 cents originally expected. “Conversely, payout of the insurance on those contracts will be 91.375% by AIG, JPMorgan (JPM), Goldman Sachs (GS), Wachovia (WB), and RBS (RBS), among others,” Action Economics said. If some of those institutions aren’t able to come up with the cash required to settle those contracts this weekend, it could trigger a fresh wave of liquidation sales, much like Lehman’s bankruptcy did.”
There were no fails associated with that auction I thought, which would imply that cash/collateral payment is not an issue.
The auction merely set the price; payment is yet to occur.
I don’t understand the mechanism fully, but was under the impression that when the auction was finished if anyone was unable to make good on the contract then there would be a fail. Obviously, you still have to pony up the cash, but I believe these parties have to post margin along the way. So when LEH bonds went from 60 to 15, I think a lot of those firms already reserved for the hit. Maybe a CDS guru can clear this up.
No margin requirement (usually). CDS contracts on LEH will be settled in the next couple fo weeks. ISDA says that after netting only $8B will change hands. I find this hard to believe.
Is this $400B CDS all issued by LEH or are they issued by other banks but with LEH as the reference entity or a mix of both?
ymc Wrote: ------------------------------------------------------- > Is this $400B CDS all issued by LEH No, if LEH owes you on such an arrangement then you are an unsecured creditor of LEH > or are they > issued by other banks but with LEH Yes (or by LEH vehicles) > as the > reference entity or a mix of both?
I think the margin requirement depends on who you are dealing with. I was speaking to a guy on friday who is active in the CDS market who said that every CDS position he takes is fully collateralised, with daily marking. I don’t know if this is a company specific policy or an innovation post LEH, but that’s what he said their policy was - and he gave GE as an example of a company they would trade with as they wouldn’t post collateral.
ymc Wrote: ------------------------------------------------------- > Is this $400B CDS all issued by LEH or are they > issued by other banks but with LEH as the > reference entity or a mix of both? not sure too many asset managers would be buying insurance on Lehman Bonds from a Lehman Dealer, but I wouldn’t put it past em. It’s like giving your friend a $100 loan, then pay him $5 a year to guarantee you will get your $100 back.
"Conversely, payout of the insurance on those contracts will be 91.375% by AIG, JPMorgan (JPM), Goldman Sachs (GS), Wachovia (WB), and RBS (RBS), among others, Is it a coincidence that each of those banks have either changed, merged, or come across $$$$ from the Government/Taxpayer? Perhaps because of, not inspire of the Lehman CDS issue? The CDS issue is not close to being over!
I just read a BAC piece on the LEH CDS auction. The bottom line is that the economic impact has already been felt, as I suspected. Daily margin is required and if a counterparty was unable to meet those calls “at that time” then they would be in default. The final settlement price meant an incremental increase in collateral was necessary since it was slightly lower than what was expected. It could be that this additional hit could cause problems for some fo the firms involved, but again, the difference was something like 13 expected to 8.875 final, so a small delta.
“I think the margin requirement depends on who you are dealing with. I was speaking to a guy on friday who is active in the CDS market who said that every CDS position he takes is fully collateralised, with daily marking. I don’t know if this is a company specific policy or an innovation post LEH, but that’s what he said their policy was - and he gave GE as an example of a company they would trade with as they wouldn’t post collateral.” This is a minority position. Most brokers still allow their large and well capitalized clients to trade CDS without collateral, or with very lenient requirements (i.e. full netting across all CDS positions, monthly marking, high threshold of market movement before collateral is required).
newsmaker Wrote: ------------------------------------------------------- > “I think the margin requirement depends on who you > are dealing with. I was speaking to a guy on > friday who is active in the CDS market who said > that every CDS position he takes is fully > collateralised, with daily marking. I don’t know > if this is a company specific policy or an > innovation post LEH, but that’s what he said their > policy was - and he gave GE as an example of a > company they would trade with as they wouldn’t > post collateral.” > > This is a minority position. Most brokers still > allow their large and well capitalized clients to > trade CDS without collateral, or with very lenient > requirements (i.e. full netting across all CDS > positions, monthly marking, high threshold of > market movement before collateral is required). But that would be in normal times. I’m guessing that those “practices” have been thrown out the window. I guess we’ll have to wait and see when the dust settles.