Credit Default Swaps Signal Brokerage Trouble
Put it this way. Look at what is happening to Thornburg Mortgage (TMA). It supposedly only has a 0.44% default rate on its mortgage portfolio that it services but the bonds it owns are getting pounded. Result? Margin call. The worst part is that the company went to sell some bonds to settle the margin calls and couldn't. The ultimate Roach Motel.
Enter LEH and BSC. LEH reportedly has two times the capital in CMBS and nearly five times the capital in 'hard-to-price' securities. Hard-to-price in my book equates to hard to sell. If you were TMA's auditor would you sign off on its 10Q? I wouldn't. BSC is actually in worse shape. It has irritated so many clients that its business model is broken.
What would happen if you told it to sell its 'hard-to-price bonds'? The company couldn't. No one has the balance sheet to absorb it. So you can see the vicious cycle developing.
CDS on LEH is now approximately 250 basis points and 350 basis points on BSC, out nearly 100 basis points in a month.
My firm remains negative on these names and we're staying short the credit. In my book, they are insolvent. I feel bad for all my friends that work there, but I did the Drexel Burnham stint and I saw my stock go to 0. Yes, it can happen. Quickly.
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can u imagine the downside when we get em in equity???
I know what a CDS is, but would ask you explain what you mean by the above statement.
Thanks
and i didn't cover the short soon enough so i ended up w/some bizarre statemet of profit that never made sense to me. i had calculated a good chunk of change... using the math that we engineers use... not sure what base system is used in fianance calculations sometime however. enlighten me!
what is *supposed* to happen when a shorted stock goes to 0?
tks
Will your CDS shorts pay off, if Bear doesn't actually go BK (which it appears is off the table), and with Lehman looking a good bit healthier now?
In retrospect, short the stock(s) or long puts would have made a killing... But did the Fed's actions last weekend obliterate your swap plans & profit, despite a remarkably prescient call?
