The eloquent and highly perceptive Ambrose Evans Pritchard informs readers to the problem Jim has long stated. Derivatives were always going to be the big problem.
The world at large is slowly beginning to awaken to what Jim Sinclair has been saying for a long time.
Fears of Lehman’s CDS derivatives haunt markets
It is a full week after bankers gathered in New York to start sorting out the derivatives mess left by the bankruptcy of Lehman Brothers. We still do not know who is on the hook for some $360bn of default insurance, or how much they will have to pay.
By Ambrose Evans-Pritchard
Last Updated: 12:18AM BST 17 Oct 2008
Lehman Brothers former chief executive Dick Fuld has faced heavy criticism
Ominous talk of big names and big sums continues to haunt global markets, thwarting efforts by the US and European authorities to unlock inter-bank lending. Traders have noted with acute interest that insurer AIG – now nationalised – says it will need another $38bn from the US government, on top of the $85bn bail-out it has already received. AIG is the world’s biggest underwriter of credit protection.
Those on the wrong side of these Lehman debt contracts – known as credit default swaps (CDS) – must come up with the money by Tuesday, the next D-Day in the ever-fraught calendar of the credit markets. There has been a deafening silence so far.
There is no easy way of finding out who they are, so every bank and insurer is suspect. The $55,000bn CDS market is “completely lacking in transparency and completely unregulated” in the words of Chris Cox, the chairman of the US Securities and Exchange Commission.
The settlement auction on Lehman CDS contracts last week was in itself a bombshell. Creditors retrieved just nine cents on the dollar from the Lehman wreckage. As Naked Capitalism put it, the bank had “vaporised”. The biggest players at the auction were Goldman Sachs and Deutsche Bank but they were almost certainly transacting for clients.
The insurers of the debt — a third are hedge funds — will have to pay 91pc of the $400bn in contracts.
What good is knowing all of this when our esteemed financial leaders pulled the plug on Lehman, a very major OTC Derivative creator.
I do not for a minute think I know more than Paulson and Bernanke.
The SEC overrules FASB, who in fact earlier this week allowed the gang to lie, allowing those cartoon values come back onto balance sheets. Now we are at square one. What just sold for .0875 cents by Lehman can be valued at whatever your in house demonic thief geek says is value to maturity, even though there is no way to know what market conditions will be at maturity. Why not say $90 or more on the .0875 OTC bag of crap just sold by Lehman?
Think about this!