walkitout (walkitout) wrote,

so much for too big to fail

After three days of meetings -- Friday, Saturday and today -- Hank and company have apparently held their ground and the NY Fed was unable to convince the rest of the street to do an LTCM for Lehman. Barclays walked away, and B of A is apparently thinking they can do better with Merrill (does that mean B of A won't be picking through the remains of WaMu?).

Everyone who was cranky about the bailout of Bear Stearns? Now we get to find out what happens when you let one of these houses topple. I will admit to some morbid curiosity of my own. With any luck, given how unsuccessful backstopping Bear Stearns turned out to be, this won't be noticeably worse. (Do you believe that? I don't believe that. Not for a minute.)

BK filing expected by ETA: midnight tonight.

ETA2: I wonder how AIG feels about this weekend's news? Their conference call Monday would have otherwise been all exciting to anticipate and speculate about, but this pretty much ate up everyone's spare weekend business gossip cycles.

ETA3: Apparently a whole _lot_ of people went to work today when Barclays pulled out to prep the trades for when markets open Monday.


ETA4: I keep failing to understand. To _do_ the trades between 2-4 p.m. today (!!), contingent on the BK filing happening. Is this a big exercise in transitive closure? Bank A -> Lehman, Lehman -> Bank B gets turned into a Bank A->Bank B transition? Ad absurdum? The mind boggles.

ETA5: I think that's a reasonable summary, but apparently this has turned into a poker game where everyone is showing everyone else their hands. Weird.

"One person familiar with the matter said large dealers contemplated showing each other all of their credit default swap trades with Lehman. Disclosing their positions may enable dealers to find ways to offset their positions with each other wherever possible. Later in the day, some traders were told that Lehman -- with the help of Federal Reserve officials -- will try to figure out which of its counterparties have CDS trades that can be offset. Those counterparties would be informed of the offsetting positions, following which they can unwind their respective swaps with Lehman and concurrently enter into new swap contracts with each other. For example, if one dealer has bought a swap from Lehman and Lehman bought a similar swap from another bank, the two banks could agree to face each other directly."

I waffle between wanting to understand this stuff better, and not wanting to know anything at all.

ETA6: Hey, this is actually a _good solution_! The net effect is a drastic reduction in the total dollar value in credit default swaps, which is essentially a form of leverage WITHOUT, as near as I can tell, any particular pass through effect to the economy-as-normal-people-experience-it. I don't think it improves capitalization anywhere, tho, because these things don't show up in the accounting in any kind of straightforward way.

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