In a nutshell, the $600 trill notional value fo derivatives (fx swaps, option, CDS etc) has to be trimmed off all netting agreements and also nettin gof collateral. Avoid double counting. The net after ISDA and cash collateral is counterparty risk. So for a firm like Lehman that may go bust, the risk to the financial system would be Lehman’s liabilities (net of cash and net fo ISDA etc,) of in their OTC derivatives (not LEhman’s assets via the OTC deriv)

as of end of 2007 barcap has $5tn of cds in outstanding notional. compare this to the total of $51tn according to the latest triennial study by BIS. the only other dealer with larger outstandings is JPM with ~$8tn.

now the claim that losses would be ~$40-50bn in worst case scenario is absolutely insane. according to the same BIS study, gross mkt value of CDS outstanding is $11tn (this is the total market value necessary to replace existing contracts). so if netting and collateralization fails this is the dough at risk. btw, assumption that there is a PROPER kind of margining mechanism in place for cds is absurd. a well known fact being that e.g. mbia never had to put a margin with anyone. getting back to the BIS study, including benefits of collateral and netting, total net mkt value of CDS is $2.7tn, the figure BIS sounds to be pretty cool with. however, if we add all the dealer equity (55 biggest institutions) it will be way less than that. actually, barclays has only $60bn of equity, and that is all that supports its massive $2.4tn balance sheet. they must be shitting their pants down at the barcap.

If I were another creditor of the failed counterparty, I would fight to have the assets and liabilities treated separately.

Is there existing case law and precedent of bankruptcies resolved where the judge accepted netting of these contracts?

I suspect that they are too new for us to know for sure how they will be treated once they land in court. Also, do we even know which court will have jurisdiction (New York, London, a Caribbean island, all of the above)?

1. There are $1 trillion in outstanding subprime mortgages, with potential losses estimated at about $250 billion

2. biggest impact of rate resets, from a dollar perspective, will come in the third quarter of 2008. She sees losses from all loan defaults exceeding $500 billion in 2008.

3. A report last week by Standard & Poors ratings agency showed global stock markets were devastated with a collective loss of $5.2 trillion in the month of January alone.

4. Quoting Bank of America chief market strategist Joseph Quinlan ,”The crisis, which has spread beyond U.S. shores to banks and other sectors worldwide, is one of the most vicious in financial history”.

5. According to the report, the meltdown in the U.S. subprime real estate market has led to a global loss of $7.7 trillion in stock market value since October.

Sorry about that!! Wish I could go back…

1b. …the biggest impact of rate resets, from a dollar perspective, will come in the third quarter of 2008. She sees losses from all loan defaults exceeding $500 billion in 2008.

2. Quoting Bank of America chief market strategist Joseph Quinlan ,”The crisis, which has spread beyond U.S. shores to banks and other sectors worldwide, is one of the most vicious in financial history”.

http://seekingalpha.com/article/…ay-in-the- shade

A report last week by Standard & Poors ratings agency showed global stock markets were devastated with a collective loss of $5.2 trillion in the month of January alone.

There are $1 trillion in outstanding subprime mortgages, with potential losses estimated at about $250 billion, said Bose George, an equity analyst with Keefe, Bruyette & Woods Inc. Columbia University professor Charles Calomiris pegs the losses even higher — at between $300 and $400 billion.

Merrill Lynch’s Bostjancic said the biggest impact of rate resets, from a dollar perspective, will come in the third quarter of 2008. She sees losses from all loan defaults exceeding $500 billion in 2008.

This is like going to a dog track and watching the “pros” leaf through the data on dogs and track history and then rush to the window to place bets on the perceptions of which dogs have the best odds of winning (in the next few minutes). It will continue to be watching these retards figure out how to make sense from chaos. Best of luck, and remember, the early bird catches the worm!