Comments on: Initial Lehman CDS Auction: 90 Cents on the Dollar, Worse Than Forecast

By: Kady

Kady — Fri, 10 Oct 2008 20:24:00 +0000

@yves Thanks for your explanation about Delphi’s bankruptcy and its role. That was the final piece in the puzzle for me. I knew I had read something about a scramble for bonds under one of these contracts but it was so long ago, my addled brain simply couldn’t recall.

By: dlr

dlr — Fri, 10 Oct 2008 19:15:00 +0000

Does anyone have any idea of the dollar amount of CDS’s outstanding in the Washington Mutual case? I have read several news articles about this whole thing, but there was never any estimate of the WaMu CDS’s outstanding.

By: dlr

dlr — Fri, 10 Oct 2008 19:13:00 +0000

So when will the money actually start changing hands? When will we know, if ever, if someone or many someones are going to default? Do they have a time limit before they settle up, like a month or a day or? Do the holders of the contracts have to take them to court if they drag their feet, or make excuses?

Seems like the payoff/failure to payoff could drag out for months. How long did it take for things to get settled in that Delphi case?

By: Anonymous

Anonymous — Fri, 10 Oct 2008 19:02:00 +0000

I don't understand a thing about all this CDS-s***.

Now I read the open interest is only 5 billion USD.

So all the scary number were largely overdone?

OR???!

By: ciccocicco

ciccocicco — Fri, 10 Oct 2008 18:51:00 +0000

If I remember well from my times at the bank, often the same bank was at the same time writer of CDS and buyer of CDS as part of a trading strategy.

This would mean that, assuming no counterpart bk, the net payment will be much less then total outstanding.

Also, looking at the net payments, somebody will be giving out money, others will be receiving a lot o money, who ?

By: Anonymous

Anonymous — Fri, 10 Oct 2008 18:38:00 +0000

“The only way to resolve this is for the U.S. government to declare “force majeure” and annul these contracts.”

I’ve been saying that all week; in essence, rescind the contracts. CDS’s are insurance policies — and recission is done routinely in the world of insurance — so what is the problem? Unwind them! Whatever the consequences, it can’t be half as bad as letting them continue to create the opacity that everybody says is the heart of the problem.

By: bena gyerek

bena gyerek — Fri, 10 Oct 2008 18:19:00 +0000

results:

http://www.creditfixings.com/information/affiliations/fixings/auctions/current/lehbro-res.shtml

still trying to determine the implications.

note that the final price is actually 8.625% (reflecting the overhang of offers in the net open interest).

By: Anonymous

Anonymous — Fri, 10 Oct 2008 18:08:00 +0000

When do these bagholders pay up?

By: Yves Smith

Yves Smith — Fri, 10 Oct 2008 17:38:00 +0000

Joe in Morgantown,

In the first big bankruptcy involving CDS, Delphi, the amount of CDS, as with Lehman, considerably exceeded the amount of bonds. The CDS documentation required that you deliver the bond. However, a massive scramble for bonds would have led to prices that in no way represented their settlement value in bankruptcy, and more important to all the participants, would have thrown the entire CDS market into chaos, since for pretty much every "reference entity", there have been far more CDS written than the face amount of related bonds. They they devised the auction/settlement process and do NOT require delivery of bonds.

In hindsight, it might have been better to blow up the market back then, but no one was willing to do that.

By: Anonymous

Anonymous — Fri, 10 Oct 2008 17:35:00 +0000

Steve;

Good points, but how would one go about declaring "force majeure" when the definition is:

"Force Majeure (French for "superior force") is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as war, strike, riot, crime, act of God (e.g., flooding, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract. "

Which terrible event would one claim when all parties were (supposedly) willing, able and all understood what their accountability was?

And who would be the one to "call time out"? Paulson?