Stimpy

CDS Demonization Watch, Gretchen Morgenson Edition

FELIX, give it up.

Stop trying to defend these little horrors.

They are DOA,

CDS, RIP

Did Merrill's Trading Desk Blow Up in Q4?

It's more than possible when you consider that Merrill and B of A were almost CERTAINLY counterparties (to each other) on BILLIONS of CDS that were rendered "unhedged" when they merged.

The Murky Lewis-and-Thain Story

PS, Croco, go read the transcript of the BAC CC.

You will see 12B is counterparty risk write offs (some with the monolines, some uncharacterized) as a result of the merger.

That is gap Felix cannot understand.

The Murky Lewis-and-Thain Story

Chris: ISDA is the swaps and derivatives association.. Think of them as the NRA and swaps as guns.

BDs are broker dealers. Think of them as gang members carrying guns.

CMBS are commercial mortgage backed securities.

Crocodilian, the Bof A board was clueless.

Flowers was only looking at ASSETS of Merrill, using indexes to value individual securities. They would not have had access to Merrills counterparty book. It is likely that CDS exposure is not known in real time even by the back office people. That how Kerval got into trouble at Soc Gen.

These little nightmares are killing us slowly, drilling holes in the bucket the FED is trying to fill faster than we can pour in the water.

CDS should RIP.

Till they do, nothing will work.

The Murky Lewis-and-Thain Story

It is really pretty simple Felix.

The losses DIDN'T EXIST until the deal actually closed.

The reason you can't/don't understand it is becuase you insist on continuing to dismiss the structural problems CDS present and choose instead to focus on the ISDA hype that damage to the system is counted only in cash settled notional on a defaulted reference (see your silly math on the 7B "low-cost" of the Lehman failure).

In fact, systemically important BDs are not pricing EACH other's counterparty risk AT ALL (retaining it as profit instead); and only do so when forced by a failure of one of them, or in this case, an aquisition of one by the other.

So suppose, just for a second, that a big chunk of the "hedge" that BAC has in place is with Merrill as a separate Company.

Merrill, by the way, won the coveted "derivatives house of the year" award in 2007 for expanding market share in CDS some 50% in 2006 alone.

Now both Companies are counting themselves as "hedged" with the other as the offset.

Once combined, of course, neither is actually hedged, and that must be recognized even as spreads (especially on CMBS) blow out late in Q4.

Now add in all the "chain exposure" that the 2 companies can end up with as other counterparties are interposed but one or the other ends up with netted risk DOUBLING (at least) as a result, and do the same math.

remember that the "new" risk must be hedged AND funded with new collateral (post the Lehman event) and you see how 1+1=6, or .6 as the case may be.