The financial catastrophe that didn't happen - Jay Maynard

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Wednesday, 22 October 2008

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0721 - The financial catastrophe that didn't happen

One part of the recent financial mess, according to the MSM, was the financial instrument known as the "credit default swap", or CDS. It's a financial guarantee that another institution won't default on its obligations. The MSM was predicting that CDSs would trigger a snowball effect if they ever had to be paid, because nobody could afford to pay off.

Guess what? The bankruptcy filing of Lehman Brothers on September 15 triggered payment of its CDSs. Everyone involved paid their obligations, finishing up yesterday - and that was it. No drama, no cascading failure, nothing.

Of course, you won't hear about that from the MSM, which doesn't care about collapses that don't happen - because they won't help Obama get elected. I had to read it at Power Line. You can, too, if you want all of the explanation.

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Comments:

[User Picture]
From:korgmeister
Date: - 0000
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Not to mention that those in the media, despite often being possesed of fantastic ignorance, like to play at being infallible and all knowing.
From:sethb
Date: - 0000
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He does get the facts somewhat wrong.

Sellers of CDS protection aren't any more required to mark to market daily than they would be if they didn't sell it. (That is, some sellers are entities that have to mark to market each day because of what they are, not because they're in that market.)

Some sellers have to post collateral, under some circumstances, depending on who the broker is and their other positions. There is no exchange that CDSs trade on that requires collateral (yet).
From:mosch2000
Date: - 0000

CDS Settlements

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If ever there was a time for 'no news is good news', it was during the Lehman CDS Settlement.

In all, it appears that Lehman's collapse was sufficiently well foreseen, that nearly everybody ate their losses earlier in the cycle (by hedging their remaining exposure back to zero), so that during the netting session, most people came out relatively unscathed. ($6b wasn't hedged, out of $400b of notional value.)

The fact is, it's not a political story, and it'd be a terrible news story. It'd be like reporting that there was NOT an earthquake in Los Angeles last night.... except with the added barrier that first you'd have to explain what an earthquake is, and what the earth is, because the fact is that almost nobody outside the financial world really understands how it is that CDSs are used in practice.

Not everything is politics. Not everything is a huge conspiracy to keep the rich white man down. Grow up.
[User Picture]
From:jmaynard
Date: - 0000

Re: CDS Settlements

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The only problem with your theory is that the media made a big deal out of CDSs and how they were going to bring down the rest of the financial system - yet when they failed to do so, there's nary a squeak out of them. It's a news story to just the same extent that their original fear-mongering was.
From:mosch2000
Date: - 0000

Re: CDS Settlements

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They failed to do so? CDS exposure single-handedly destroyed AIG. If AIG had been allowed to fail, god only knows how far it would've cascaded.

It's true, there wasn't an earthquake in Los Angeles last night, but the lack of a catastrophic event at the netting session doesn't solve the problems with transparency and the potential for more hidden AIG-like situations.

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