Skip to comments.FACTBOX-Fannie, Freddie CDS auction timeline
Posted on 10/05/2008 8:31:18 PM PDT by RegulatorCountry
NEW YORK, Oct 3 (Reuters) - The value of credit default swaps backed by the debt of Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) will be set on Monday in a series of auctions, which will be the largest settlement of the contracts the market has ever seen.
Four separate auctions will be used to determine the value of the agencies' debt. The auctions are for Fannie Mae's senior debt, Fannie Mae's subordinated debt, Freddie Mac's senior debt and Freddie Mac's subordinated debt.
Estimations on how much credit protection is outstanding on Fannie and Freddie's $1.6 trillion in debt range from hundreds of billions of dollars to as much as $1.2 trillion.
(Excerpt) Read more at reuters.com ...
Lehman follows on 10 October and Washington Mutual on 23 October. Lots of agony potential for the month.
Too bad several years ago no one thought to look at the real value of Fannie and Freddie. Oh, I almost forgot - the Republicans did but the Democrats said everything was fine.
Be sure to get Schumers ass plastered up there.
I'm not so sure anyone got a look at their books in recent years. A fair amount of stonewalling was going on, as best I can recall.
What I think is happening is that they are auctioning off the $1.6 Billion of bonds issued by Fannie Mae and Freddie Mac, and somehow that determines what losses the CDS's have to reimburse.
Selling these bonds by itself would be fairly straight forward. In a bankruptcy (technically, I guess this is not a bankruptcy, but some mutation thereof) one sells off the assets for what one can, perhaps at an auction such as this. The bond holders, starting with the senior holders, gain the results of the sale.
So ... where do the Credit Default Swaps (CDS's) come in?
CDS's are essentially insurance policies. Companies have taken out these CDS insurance policies on Fannie and Freddie Bonds. That means they pay a monthly premium to some insuring company, in return for which they get paid if the referenced bond fails.
Apparently (and here I'm going from guess to wild speculation) these CDS's pay out a varying amount, depending on just how bad the referenced Fannie or Freddie bond fails. So, the less money these bonds fetch at this auction, the more it costs the companies that issued these CDS contracts.
I wonder who the primary companies are that issued this CDS paper?
If JPMorgan is at the top of the list, and if the auction of these bonds of Fannie and Freddie goes poorly (the bonds sell cheap) then I'd expect another bank or two to fail, taken down in the middle of the night, as was Bear Stearns, so that JPMorgan can feast on the failed banks carcass, pick off the solid assets, and leave the toxic remains for the tax paying citizens of this great land to consume. That's how JPMorgan seems to be keeping from going under, even though they issued (if I recall correctly) more CDS's than anyone else other than perhaps AIG.
If some other company is the leading provider of CDS insurance of Fannie and Freddie bonds, and if the auction goes poorly, then I'd expect that company to become visible as a rotting corpse in the desert, in the near future, with its insured assets covered by the FDIC (you and me, again ;).
That's not surprising, now that I read it.
It seems to be as I guessed, which just goes to show you that I've spent way too much time this last month surfing financial pages on the web.
He makes an interesting analogy with being just at the front of a big earthquake, using the following graphic:
How about Obama openly campaigning for his communist cousin Odinga who signed a pact with Muslims to enact Sharia Law if elected and started riots when he lost. Obama campaigned for an openly Anti-American candidate in a foreign country in 2006.
Getting Obama out of our life is just as important, when we finally get Palin in there we’ll have another boom.