Lehmans

chucky

it happens as an auction by the major banks where they see what of Lehmans portfolios/books have a value which they then calculate what is recoverable.
it's a bit more complex than this as there is a lot of legal steps to follow due to the structure of the trades anyway (cash or physical settlement for example)

they would then do this by Bond and it's all dependent on the seniority of that bond. so one maybe 20% and another 40% recovery.

as far as the individual trades go there won't be much impact i wouldn't of thought (and hope too) - there are Buyers and Sellers which once these trades are settled usually always net out on the market. also it would also depend if a trade is settled as a cash settlement (which is more of an immediate impact) or a physical settlement.

Generali

chucky wrote: »

it happens as an auction by the major banks where they see what of Lehmans portfolios/books have a value which they then calculate what is recoverable.
it's a bit more complex than this as there is a lot of legal steps to follow due to the structure of the trades anyway (cash or physical settlement for example)

they would then do this by Bond and it's all dependent on the seniority of that bond. so one maybe 20% and another 40% recovery.

as far as the individual trades go there won't be much impact i wouldn't of thought (and hope too) - there are Buyers and Sellers which once these trades are settled usually always net out on the market. also it would also depend if a trade is settled as a cash settlement (which is more of an immediate impact) or a physical settlement.

So to paraphrase, there is an auction of outstanding trades in the market to see what is likely to be recovered from unsettled trades. The loss is (gu)estimated from that auction and from that the amount payable on each CDS contract is worked out according to ISDA(?) rules. Is that right?

In the absence of any knowledge, I'd always assumed that a CDS would pay $xx per contract once a default event was announced by whatever body was empowered to do that in the documentation.

My suspicion is that problems could arise if someone had taken on a big long equity position on the cheap and hedged it with a CDS and that CDS was written unhedged because some idiot had taken a view that Lehmans was 'too big to fail' or thought they knew something when they didn't or some such.

chucky

yes that's right - ISDA would publish the results according to their criteria.
i would say that CDS trades are a bit more complex than just paying xx amount. this is due to the type of Credit Event occuring and also the Deliverable Obligations in the event of a Credit Event. a CDS contract is quite a complex bit of legal documentation.

there are people exposed but don't think it's enough to move the market - it's usually the major banks who take part in the auction and they're close enough to know where they are with regards to Lehmans.

this are the final results of the Freddie and Fannie auctions.
http://www.creditfixings.com/information/affiliations/fixings/auctions/current/famefrmc.shtml

sabretoothtigger

So is this why the market just melted down for no apparent reason.
At the same time 10 pages worth of 'companies announcing lehman losses' came on the news feed, the sp500 dropped 7%

Generali

chucky wrote: »

yes that's right - ISDA would publish the results according to their criteria.
i would say that CDS trades are a bit more complex than just paying xx amount. this is due to the type of Credit Event occuring and also the Deliverable Obligations in the event of a Credit Event. a CDS contract is quite a complex bit of legal documentation.

there are people exposed but don't think it's enough to move the market - it's usually the major banks who take part in the auction and they're close enough to know where they are with regards to Lehmans.

That's very interesting, many thanks. I know a fair bit about what various derrivatives are through working in equities back offices so we hedge a lot of stuff and it's handy to know. I know very little of the specifics.

chucky wrote: »

this are the final results of the Freddie and Fannie auctions.
http://www.creditfixings.com/information/affiliations/fixings/auctions/current/famefrmc.shtml

So does that mean that for each $100 of notional value of the swap, a CDS against the Fannie Mae Senior debt will pay $8.49 and the subordinated 10 cents?

posh*spice

chucky wrote: »

tomorrow isn't when they need to settle ANY default swaps, so it will be extremely unlikely that it will even bother the City - please don't try and write history... plus results will be published at approx 3:30 UK time.

I'm not trying to write history because that is in the past and I am discussing something that is going to happen in the future?

But apart from that either you are right or the financial press, I thought I'd trust the financial editors to get the correct take. Maybe they are wrong? According to them there is $400 billion of the stuff out there tomorrow relating to Lehman?

Maybe you are right, the press like to exaggerate

chucky

Generali wrote: »

That's very interesting, many thanks. I know a fair bit about what various derrivatives are through working in equities back offices so we hedge a lot of stuff and it's handy to know. I know very little of the specifics.



So does that mean that for each $100 of notional value of the swap, a CDS against the Fannie Mae Senior debt will pay $8.49 and the subordinated 10 cents?

yes that's basically it, that's all it was - the actual payment of these happens sometime after the auction, a couple of weeks i think, not too sure.

hopefully there won't be too much counterparty risk out there to move the market

neverdespairgirl

chucky wrote: »

it happens as an auction by the major banks where they see what of Lehmans portfolios/books have a value which they then calculate what is recoverable.

I hope you don't mind my asking, but you seem to know about this stuff.

When you say portfolios / books, do you mean loans they have made and investments they hold? So other banks sniff round them, and work out what they think they are worth, and then they are all auctioned?

Then the money goes to the Lehman creditors?

sabretoothtigger

The press reports what has happened and the effects of that but the market looks ahead so I dont think they share the same focus

Generali

posh*spice wrote: »

But apart from that either you are right or the financial press, I thought I'd trust the financial editors to get the correct take. Maybe they are wrong? According to them there is $400 billion of the stuff out there tomorrow relating to Lehman?

My experience is that a lot of people that write about finance and business are anything but experts.

An acquaintance was taken on by a national newspaper to write about theological matters but most weeks wrote at least one big piece on finance or economics despite not having a clue about or any interest in what he was writing about.

Things like ISDA rules regarding the unwinding of CDSs are very specialised knowledge and I'd be surprised if more than one or two staff members on the FT knew them off hand, although I'm sure many of them would have the knowledge or contacts to find out.