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From Calculated Risk: Credit Spreads: Still Getting Worse
http://calculatedrisk.blogspot.com/2008/10/credit-spreads-still-getting-worse.html
These is still no relief in the credit markets.
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There was uncertainty solved with the LEH auction all right, and it was not good:
“An auction of Lehman’s bonds yesterday determined that the bank’s borrowings were worth only 8.625 cents on the dollar. The valuation leaves the insurers of the debt a bill of about $365 billion. It is not clear whether the insurers, which are required to settle the bill in the next two weeks, will be able to pay – a development that could further undermine increasingly stressed capital markets.”
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4922981.ece
There are 60-70 trillion in credit default swaps (CDS) and they are worth about 8.6 cents on the dollar and somehow this is somehow a good thing because it “frees up some money”???? Pass the crack pipe please. The 700 billion dollar bailout is like a band aid on a bazooka hole.
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The insurers now have two weeks in which they will have pay $365 billion dollars. I don’t know where they have the money stashed, but they are presumably selling everything they have and that is what is driving down the market. I didn’t know about the two week delay. But at the end of that time, the $365 billion pot of money will no longer be tied up waiting for the settlement and will be back in the hands of people who will be able to invest it, or at least pay back people they borrowed from who can then invest it. There are probably severe restrictions on what the insurers can do with the money in the interim, and that forces them to invest only in government securities, which is why the TED spread is so high.
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Jon,
That’s the most positive angle a person could take on the fact that 60-70 trillion in outstanding CDS is now going to be worth less than 5 trillion.
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Matthew, Where did you get the idea that $60T of defaults had occurred? That would only happen if there was an all-out nuclear war. Lehman and Bear held on to the worst tranches of the mortgage debt. The remainder will be in much better shape.
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From Bloomberg:
-Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. would be forced to pay holders 90.25 cents on the dollar under initial results of an auction today, setting up the biggest-ever payout in the $55 trillion market.
Preliminary results of the auction to determine the size of the settlement on Lehman credit-default swaps set an initial value of 9.75 cents on the dollar for the debt, according to Creditfixings.com, a Web site run by auction administrators Creditex Group Inc. and Markit Group Ltd. A final price is scheduled to be announced at 2 p.m. New York time.
The payment would be higher than indicated by trading in Lehman’s $128 billion of bonds yesterday. The debt was trading at an average of 13 cents on the dollar, indicating credit swap sellers would have to pay 87 cents.
More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly how much is at stake because there’s no central exchange or system for reporting trades. It’s that lack of transparency that has increased the reluctance of financial institutions to do business with each other, exacerbating the global credit crisis and prompting calls for regulation of the market.
The list of participants includes Newport Beach, California-based Pacific Investment Management Co., manager of the world’s largest bond fund, Chicago-based hedge fund manager Citadel Investment Group LLC, and American International Group Inc., the New York-based insurer taken over by the government, according to the International Swaps and Derivatives Association in New York…..
BNP Paribas SA strategist Andrea Cicione in London estimated earlier today that a 20 cent recovery rate would lead to sellers paying out as much as $220 billion.
“Banks can go to the Federal Reserve, or use the commercial paper market where it is still functioning” to meet protection payments, said Cicione. “But fund managers or hedge funds, once they’ve used their cash, have only one option, to sell assets.”
Defenders of CDS had long argued that the guarantees were hedged with offsetting swaps. We are about to find out whether that true.
Topics: Banking industry, Credit markets, Derivatives
Posted by Yves Smith at 11:56 AM
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I’ve seen CONSERVATIVE estimates that the CDS market is 60-70 trillion. I’ve seen it quoted in that range from bloomberg, CNBS, 60 Minutes, and other various media outlets.
I haven’t said that 60 trillion in defaults has occured, I said that the CDS market is estimated to be 60 trillion.
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I wonder when the Tim will post the news of the 936 point gain we saw today? It was the largest gain ever and certainly worthy of mention…. right?
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Hooray. Crisis averted.
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That-a-boy!
We are one step closer to balanced coverage!
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I think the market may go back down. Notice that this didn’t support Tim’s usual hypothesis and the smug retort.
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Harley, where were you during the big drop last week? Oh, there you are….FIRST comment posted at #108. Come back and see us tomorrow when the market starts tanking again in 3…..2……1……
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Mikal,
Absolutely. Usually it is followed by “Yeah but”. It is just one more example of the long list of bias here at the Bubble.
I was surprised by the political punditry in the Gregoire post. Unfortunately I do not have the frame of reference to opine about the Seattle politics so I will stay out of that fight.
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The more important issue is the credit markets, we will see over the next few days if the credit markets have thawed
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David McManus,
Sorry about my lack of availability. I have family in town and tons of work to do. I will try to be more available for you.
Like most investing you can’t freak out about one day, one week, one quarter, or a year. Invest for the long term and you will be fine. Now might be a great time to invest for the long-term. The problem is everyone wants to make money now and very few see long-term investing as being of any value.
To be honest, the Bubble is definitely losing its appeal. The graphs and work the Tim does over all is great. However the spin machine is out of control. It is way too biased, definitely pro-anarchist, censors opposing opinions, and now venturing into political punditry.
David I will try to come back tomorrow, but it will likely be Thursday. You can beat up on me then!
As always, looking forward to it!
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Yes, Harley, make sure to cherry pick and only pop in on good market days.
Good Market Day
SEE!!!! SEE!!!!! I TOLD YOU SO!!!!! SEE!!!
Bad Market DayReply – Quote
crickets chirping…….
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Yes David, but you are no different.
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Really? How so?
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You do realize that historically there are plenty of examples of considerable 1-day gains in the midst of an ongoing bear market, right? A one day bounce does not a recovery make.
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Agreed, but you are starting to remind me of Fox news.
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Oh, no, we’re down 370 so far today. I wonder what we’ll close at? :(
But hey, it was up 9 hun on Monday, and everyone said last week was the bottom.
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Dow down over 700. Guess the crisis wasn’t averted.
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For those of you keeping score at home, that’s 87% of Monday’s 936-point DOW spike that has been erased after just two days.
For the S&P 500, the 92% of Monday’s 104-point spike has been given back.
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B-b-but Tim…
Bernanke says we have to give the bailout “time to work”…you know…just like the stimulus checks!
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http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20081012/REG/310139971
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Ugh, I DO NOT want to count on a government program for my retirement. Friggin scary.
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David,
You probably don’t want to count on a government program for other people’s retirement either.
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Agreed.
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