"... so far the failure rate on swaps (at auctions) has been low, by reports. I haven't seen specific percentages, just statements that they were negligible."
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The Meltdown That Wasn't
A primer on credit default swaps, the latest Beltway scapegoat.
'...It turned out to be the meltdown that never melted. Amazing as it is to Washington ears, those greedy, crazy people running large financial institutions did a decent job of managing their exposures to Lehman. When large banks and insurance companies were vulnerable to Lehman, many had offsetting trades that paid off when Lehman went bust. The net amount of $6 billion owed by sellers of credit protection on Lehman was far smaller than expected and was arrived at through the same orderly settlement auction process that has smoothly managed about a dozen such failures -- and all without government regulation.
In today's Opinion Journal
This is not to say that Lehman's failure didn't damage credit markets. But the problem was not a failure of the CDS market, nor was Lehman's failure caused by CDS. Toxic mortgages killed Lehman. Once Lehman went bust, CDS contracts added relatively little stress to other banks. The stress came from the failure of a big investment bank, which made people unwilling to lend to other banks.
Identifying major systemic risks in the CDS market has proven much harder than the pols expected. The big dealers that trade CDS often demand collateral from customers who owe them money on a trade. But these big dealers usually don't post collateral when the roles are reversed and they owe the customer. While this is not necessarily a sweet deal for small hedge funds doing business with a Goldman or a J.P. Morgan, it minimizes counterparty risks for the major firms. Also, the large dealers generally make their money facilitating trades for customers, not betting one way or another on corporate defaults. So if they sell a lot of credit protection to one customer, they will seek to buy it from somebody else."
More: online.wsj.com
Jim |
