Chris,

Yes indeed, the ground rules have shifted for economists regarding the nature of risk. And it looks like another chapter to the story of their relationship to “risk” has taken place.

That culture of “anything-goes” relationship to risk over the past decade that destroyed the public trust and scared everyone in the world shitless in September and October 2008 reminds me of the wild game of risk played by Judy, Peter, Alan and Sarah in the movie Jumanji ~ “A Jungle Adventure. Free Game. Fun for some but not for all.”

“In the jungle you must wait, until the dice roll 5 or 8.” This culture of anything goes with respect to risk was a giant craps game. With each roll of the dice we got sucked further into this mysterious jungle of powerfully dark forces and unimaginable fears. It was fun for those at the top before the nightmare started, but not fun for the rest of us George Jetson’s out on the dogwalk screaming “Help Jane, get me off this crazy thing!”

The risks superimposed upon us by the folks at the top will have to be overcome in real life by the rest of us. Our relationship to the nature/game of risk will have to be restored (as you say). We certainly can not return to the anything goes culture of the past. A proper relationship to risk must be balanced with transparency throughout the system. Opaque relationships to risk must be entirely eliminated from the financial system. I like the way you have framed it.

But, I disagree that private mkt participants do not have sufficient political savvy and wit to provide the necessary leadership and direction that must be undertaken. Yes, the same political class that caused this mess in the first place still exists and will not be dismantled. But we have this wonderful internet/blogging community coalescing and weighing on these matters from yourself, FT, Yves Smith’s blogging community at Naked Capitalism, Barry Ritholtz at The Big Picture etc….

We have all banded together in recent months to create an ad hoc forum that provides fruitful instruction and guidance for our political regime to follow. How else did Paulson go from buying troubled assets at make-believe prices to buying preferred stock in troubled banks to provide needed capital? Granted, it is only one step in a series, but it is nevertheless a step towards an appropriate outcome. I see our voice as a critical and hopefully influential input. The political regimes ability to respond appropriately to our input is critical to establishing appropriate outcomes – namely restoring a proper relationship to risk we can all live with.

Regards,
John Bougearel

1) I’ve bought protection and have a huge ‘paper’ gain on my LEH CDS position

2) The person I bought protection from wants be to deliver a bond

3) Egads, I need to go buy an LEH bond and deliver it.

4) Even at $0.10 on the dollar, I need to borrow $100,000,000 to buy this bond

5) And keep my fingers crossed that the counterparty doesn’t go belly up

Other side of the coin:

1) The auction is a joke

2) Bonds in bankruptcy court will probably fetch closer to $0.50 on the dollar

3)I’m out $1 billion but if I now own the bonds.

4) If I can finance this for awhile, I might make up half or more what I lost

I am not sure if this is what the article is saying, but I do think that the Lehman CDS contracts have settled (The final settlement date was Oct 21, the market has found “sort of a bottom” since then!) and consequently the funding needs should have subsided by now. The deteriorating economic outlook in the last couple of weeks is preventing LIBOR from going back to more normal levels as well. If the FED cuts 50bp today we should see a strong reduction.

I would agree with the first part. The net capital destroyed is probably close to what was reported.

The funding needs for the settlements do affect LIBOR, because of a huge increase in demand for Eurodollars. Of course this effect is magnified by a general lack of liquidity in money markets. But this lack of liquidity was for the most part caused by GSE failure and Lehman bankruptcy

So, I still question the purpose of the article. Period

The Lehman bankruptcy pushed the global financial system to the brink of total collapse with the help of credit derivatives.

I would not agree that this leads to a distortion of LIBOR. This is the free market working and reminds us on how interconnected the financial system is. After the crash of Wall Street in 1929 the first bank to fail was a European Bank located in Vienna.

>> Perhaps this state of financially engineered synthetic derivative suspension is related to the existence of the hypothesized Higgs boson and of the large family of new particles predicted by supersymmetry?

Nonetheless, one tends to want to believe that every shoe at some point must drop and that Santa has what you want in a package in a bag, on a sleigh. However, as with General Relativity, Einstein suggested that mass warps space and time, and may be able to bend light — hence, the apples falling from The Newton Tree, still may not be falling, and thus they may be suspended much like these Lehman CDS.

freddie/fannie spreads are too high because of oversupply. I believe one of the reasons for the oversupply is our foreign masters are unloading/not buying at previous rates.