On Tuesday, we might be on the hook for another $100 billion. How you ask? Here are some scary facts:
1. Entities holding credit default swaps written against Lehman Brothers will be paid on Tuesday. Credit default swaps are essentially life insurance policies for corporate bond holders. If the company goes under, the CDS covers their loss.
Many of the holders of Lehman credit default swaps never owned Lehman bonds – they were just betting Lehman would fold. In fact, some hedge fund bought these credit default swaps, short sold the stock, and spread rumors about impending doom in the media to encourage the collapse of Lehman.
2. Lehman held around $150 billion in debt, but over $360 billion in credit default swaps were written. (Meaning hedge funds were buy insurance policies on debt they did not own.)
3. Who was the counter party on many of these CDS arrangements? AIG, now a subsidiary of the US Government.
4. So on Tuesday we find out how much money the American taxpayer will ship to hedge funds — their prize for destroying Lehman.



7 Comments




Ari, #4 doesn’t make any sense to me; would you clarify?
Because the US government is propping up AIG, if they owe $100 billion in credit default swaps, we will have to pay up. Hedge funds were buying hundreds of billions on $ in Lehman CDS, without owning the bonds. So essientally they get to collect this life insurance policy.
From a Robert Pollin interview:
I think you’re misunderstanding; hedge funds are having one hell of a time now and are a significant part of why the stock market is going down(seeling assets to meet ‘investors withdrawals);
US Hedge Fund Withdrawals Reach $43 Billion in September
On a happier note:
High court rejects GOP bid in Ohio voting dispute
Ok, I see where you are coming from (though I don’t put any faith in Cramer analyses at all)
You might find this interesting:
Saturday, September 27, 2008
AIG Bailout Saved Goldman From Major Loss
I just don’t think Paulson will allow AIG to fail but, yeah, we are being screwed by the Fed and Treasury.
Oh, forgot to mention that AIG has already used up 2/3 of the monies the Fed has loaned it; the interest AIG is paying for these ‘loans’ is well over 12% as of yesterday.
Some Hedge funds are facing redemptions. Those that shorted the financials all the way down are just fine.