Charlie Bottle

A Critical Market Juncture (Again)

The introduction of a clearinghouse in the "middle" of all CDS contracts means that each contract would have as counterparty the clearing house (just like in a derivatives exchange) rather than another participant.

For example, a contract where LEH sold JPM CDS on a name, becomes effectivelly two transactions: LEH sells to the clearing house; the clearing house sells to JPM. This way JPM is not exposed to LEH counterparty risk (or vice-versa).

By creating this hub structure, this sytem effectivelly diversifies counterparty riks and allows the system to better absorb the default of any individual counterparty. The problem with the existing over the counter structure is that it coexists with concentrations of exposure to a limitied number of counterparties by any given participant which creates the potential risk for a domino effect of counterparty defaults. This is why JPM had little choice but to buy bear strearns, and why the Fed is very focused on this.

BofA CEO Lewis the Next to Fall?

I agree, very suprised that they seem poised to close the transaction, which I think is imminent now; I was expecting BAC to keep post-ponning the close and drop it at an opportune moment so as to minimize the likelly resulting disruption in the market.

I have not reviewed the financials but I supect that this is not in the best interests of BAC shareholders; possibly a desperate attempt by Lewis to save face and post-pone loosing his job?