Yves Smith on a Big Puzzle
She blogs today about a real mystery in financial markets, i.e. why Lehman’s CDO auction didn’t turn into a disaster. This is rough going, but this issue is key to understanding how events have progressed since the Lehman Bankruptcy:
WEDNESDAY, NOVEMBER 5, 2008
“Credit Swaps Top $33 Trillion, Depository Trust Says”
Even though the (supposed) supervising grownups in the credit default swaps market keep making reassuring noises about the credit default swaps market, I am not entirely convinced, mainly because the picture is still somewhat murky.
Witness the Bloomberg story today, which tells us that the CDS market is smaller than we thought, roughly $34 trillion in notional amount according to the DTCC versus a not-long-ago report of $62 trillion from the IMF. The Bloomberg story create the impression that the new smaller number is solely due to the netting, when other factors may have played a role. First, we have also four large settlements (Freddie, Fannie, Lehman, and WaMu). Second, my impression is that most CDS agreements run three to five years. With spreads widening massively in the credit crunch, plus certain formerly important protection writers no longer active (AIG, Ambac, MBIA, Bear) and hedge funds (another important source) less active in aggregate, one would imagine we have had some runoff, as outstanding agreements have matured and new ones have not been written in the same volume.
The part that leaves me scratching my head is this: