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Banks Hoarding Cash to Pay Derivatives Liabilities
Tomorrow, the auction for Lehman's credit default swaps will be held, and the final result will probably be that that holders of credit default swaps will have to pay around $360 billion dollars (see below). That's for Lehman alone. Derivatives exposure due to other failed businesses is even higher.
This is why Wall Street firms and banks have been hoarding cash. As the Financial Times wrote on October 7th:
Banks are hoarding cash in expectation of pay-outs on up to $400bn (£230bn) of defaulted credit derivatives linked to Lehman Brothers and other institutions, according to analysts and -dealers.
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Michael Hampden-Turner, a credit strategist at Citi, estimates that there could be $400bn of credit derivatives referenced to Lehman.
These contracts will be settled on Friday [October 10th], and with the recovery value on Lehman bonds currently estimated at about 10 cents on the dollar, the pay-out by banks and other sellers of credit protection on Lehman could reach a gross $360bn.
As Fox News puts it:
Massive positions are just starting to be unwound in the credit default swaps market as tens of billions of dollars worth of these contracts are now getting settled in the aftermath of several high-profile flops.
Banks are hoarding cash in expectation of expected payouts on anywhere from $200bn to $1 tn–no one knows the amount, adding to volatility–for defaulted credit derivatives linked to the collapse of Lehman Brothers, the government’s seizure of mortgage giants Fannie Mae and Freddie Mac, the government’s rescue of American International Group, and the failure of Washington Mutual.
And as leading economist Nouriel Roubini wrote today in an article entitled "What Is Really Bothering Markets: Lehman's CDS Settlement on October 10 With A $360bn Expected Payout" (after quoting the above-described Financial Times articles):
Lehman was one of the top ten counterparties in the unregulated $62 trillion OTC credit default swap (CDS) market. As Lehman defaults, tens of billions worth of hedges become worthless and can only by renewed with a new counterparty at much higher premiums (i.e. CDS spreads).
Moreover, Lehman bondholders will only receive about 10 cents on the dollar in exchange for defaulted Lehman bonds and protection buyers will have a claim on 90 cents on the dollar in the hope that protection sellers will be able to perform.
Systemic event: S&P acknowledges that Lehman's default was key to AIG's demise with spillover to Europe, as well as to money market funds breaking the buck with spillover to the commercial paper market. Hedge funds's brokerage accounts have been frozen and they might also be exposed to derivatives trades.
On the 13th day of March 2008, a rare "closed door" session was held by the United States House of Representatives. It was only the fourth time in the history of the United States that the House of Representatives closed the doors and met in absolute secrecy. Thus, those who were elected to represent the people of the United States would not allow the people to know what they were meeting about. Furthermore, House Rule XVII, clause 9, forbids the Representatives from revealing what was discussed. The penalty for leaking such information includes loss of seniority, fine, reprimand, censure, or expulsion! What went on behind those closed doors where every member was sworn to absolute secrecy, to always conceal and never reveal? We know that the only reason for secrecy is to hide evil. The news media said almost nothing about the secret conclave, but it was mentioned only that one of the items being discussed was the new surveillance techniques that are going to used by the U.S. Government to watch every American. (19)
After diligently searching for more information, I finally found what I was looking for in an Australian newspaper. The story appeared in Australia.TO from Brisbane, Australia. The article stated that ABC News via WCPO confirmed that Congress members were forbidden to talk about what went on in their secret meeting. Several of the Representatives, however, were so furious and concerned about the future of the country that they began leaking info. Here are some of the things that were reportedly leaked out regarding the secret meeting: Discussion regarding the imminent collapse of the U.S. economy to occur by September 2008 - The imminent collapse of the U.S. Government finances by February 2009 - The possibility of Civil War inside the United States as a result of the collapse - The advance round-ups of "insurgent U.S. citizens" likely to move against the government - The detention of those rounded up at REX 84 camps constructed throughout the United States - The possibility of public retaliation against members of Congress for the collapses - The location of safe facilities for members of Congress and their families to reside during massive civil unrest - the necessary and unavoidable merger of the United States with Canada and Mexico - The issuance of a new currency called the AMERO for all three nations as an economic solution. (20) Obviously, there is no documentary proof for the above as the meetings were secret. The information, however, does fit the profile of what is going on around us. Our Almighty Saviour is ultimately in charge. Time will tell if these things are so, and time is running out!
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