Friday 17 October 2008

What's $6 billion between friends?

One of the excuses/reasons given for the taxpayer funded bail-out* is "Ooh, but they've got all these credit default swap derivatives, didn't you know!? Nobody knows where the losses are, the whole system might come crashing down!"

MW's Golden Rule is, the more scary that a story churned out by the gummint is, the less likely it is to be true. We are constantly told that the total value of 'over the counter credit default swaps' is $58 trillion or something and that the total losses could be ... well ... humungous anyway. (Nobody mentions the corresponding gains, of course - the overall net losses will be nil.)

As yesterday's FT editorial rather sheepishly explains:

When Lehman defaulted, the total amount of CDS on its debt was unknown. Estimates suggested that as much as $400bn might have to be paid out. That would have had the potential to cripple even the biggest banks, and may have added another element of fear to already panicky markets. While banks could work out their own exposure, neither they nor regulators could be sure what other banks owed.

To make matters worse, Lehman was itself a writer of CDS and other derivative contracts. The bank’s collapse rendered them void and left protection buyers scrambling for new hedges. Counterparty risk – ignored in the good times – was back with a vengeance.

The Depository Trust and Clearing Corporation, where most CDS trades are registered**, now estimates that only about $6bn need physically change hands next week when Lehman CDS are settled. The vast majority is netted out, and systemic risk appears marginal.


And don't forget, that $6 bn is the gross amount, that is being spread out between hundreds of different winners and losers.

There was one bank that did lose $6 bn recently, as it happens, that was Société Générale. Has everybody conveniently forgotten about Jérôme Kerviel, FFS?

One single French bank lost $6 bn and continued trading as normal!

* People tell me that debt-for-equity swaps wouldn't be a better way of sorting out the banks that the bail-out "Because they doesn't sort out the losses on the derivatives, does it?" (which is complete cockwaffle - neither does the bail-out, but hey).

** The fact that these trades are registered makes mockery of the headline to that editorial, which is "Clearing up the credit swaps fog".

5 comments:

CROWN said...

MW - your golden rule is spot on.

as you have noted previously, the government rules us as a nation in fear.

Most of the fear is spread by the government to excuse their handling.

Lola said...

Ah, now yes, I see your problem Mr. W. You really don't understand it do you? Your arguments assume that everyone in the gummint or potentially in the gummint, or who works for the gummint, or writes and comments on the gummint or even just bloody votes for the gummint is reasonbly rational, responsible, and operates with a modicum of common sense. Clearly you will need to attend a governemnt re-education centre where your errors can be explained to you and you will be given the opportunity of correcting your thinking

Anonymous said...

MW

I assume your "silver rule" is the reverse: the less scary a story churned out by this government the less likely it is to be true (eg crime is falling, education is better than ever, the NHS is still the "envy of the world" etc etc).

Mark Wadsworth said...

U, you can have the honour. Henceforth I shall refer to it as Umbongo's Golden Rule.

Anonymous said...

MW

What can I say? Thanks - I'm flattered!

I suppose the golden rule is that whatever this government says it's probably lying.