Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The coming US dollar crisis -- Ignore unavailable to you. Want to Upgrade?

To: carranza2 who wrote (16689)	1/25/2009 9:36:58 AM
From: Real Man	Respond to of 71456

If citi goes under, then a takeover by FDIC and BK is just not an option - they have only 35 bln. in cash. Unless they rewrite the rules, I think they have to take over an insolvent bank.

To: carranza2 who wrote (16689)	1/25/2009 10:03:15 AM
From: RockyBalboa	Read Replies (1) \| Respond to of 71456

GM mentioned many valid points, but she misses out that the tail wags the dog in CDS world for so long. I became well aware of that process when trading defaulted bonds in and out of CDS settlements. All happened when the CDS protocol was changed to "cash settlement", from physical delivery. As in fire insurance: I actually don´t need to own the house which is set on fire. It could be the neighbours or the ex spouses house. Or, I don´t need to turn over the wreck any more; all I need is to show a photograph of the car... Said that, while cash settlement resolved the problem of inefficient defaulted bond prices (which were sometimes too high going in a settlement), it opened the real can of worms. Derivative bets on the default and ultimate settlement prices can reach an high multiple of the default in question, as if a thousand similar houses would burn. Again, in insurance world, there is no such thing as "overinsurance". But again, in C.D.S world, there is. Enter Dura, which became one of the first cash settled CDSs. At the time of the default, an estimated 12 times the bond notional in bets riding, with the low price (20 or so) creating a huge incentive to move the settlement price into the right direction. Which did. After some months, with Dura not getting any better, the price of the senior issue nearly tripled (reaching the expected recovery value).