Posted on 09/20/2008 4:26:07 AM PDT by TigerLikesRooster
A nuclear winter?
Sep 18th 2008
From The Economist print edition
The fallout from the bankruptcy of Lehman Brothers
WHEN Warren Buffett said that derivatives were “financial weapons of mass destruction”, this was just the kind of crisis the investment seer had in mind. Part of the reason investors are so nervous about the health of financial companies is that they do not know how exposed they are to the derivatives market. It is doubly troubling that the collapse of Lehman Brothers and the near-collapse of American International Group (AIG) came before such useful reforms as a central clearing house for derivatives were in place.
A bankruptcy the size of Lehman’s has three potential impacts on the $62 trillion credit-default swaps (CDS) market, where investors buy insurance against corporate default. All of them would have been multiplied many times had AIG failed too. The insurer has $441 billion in exposure to credit derivatives. A lot of this was provided to banks, which would have taken a hit to their capital had AIG failed. Small wonder the Federal Reserve had to intervene.
The first impact concerns contracts on the debt of Lehman itself. As a “credit event”, the bankruptcy will trigger settlement of contracts, under rules drawn up by the International Swaps and Derivatives Association (ISDA). Those who sold insurance against Lehman going bust will lose a lot. But Lehman had looked risky for some time, so investors should have had the chance to limit their exposure.
(Excerpt) Read more at economist.com ...
Ping!
Good thread on Credit Derivatives.
The metaphor, “nuclear winter,” miss-characterizes both financial matters and atomic warfare. But selling news print takes precedence over proper word usage.
Financial version of "if it bleeds, it leads".
No, the fallout shelters are really avalanche fences to protect us all from snowball effects.
I said it in another thread in a longer post. WHERE WERE THE AUDITORS during this? These assets HAD to have been impaired at the time of the last audit. Why wasn’t that identified?
Certainly everybody who has some savings in banks and mutual funds. For the grasshoppers among us, it is not so clear but it may well be saving their jobs.
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