Friday, 10 October 2008

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.

There is money in the system but it's "needed" to pay for the phantom cash games played by the banks in the leveraged derivatives market. Now that the market has turned sour they are forced to cough up vast sums of money to cover their huge over-leveraged losses.

They risked way too much and have lost. However, I expect any and all methods, including outright fraud, cheating, whatever, to be used to "save" the biggest institutions from going down. It's not like these people play by the rules. Some sort of calamity will ensue, but it's unlikely these people will fully suffer the consequences of their actions, unlike the majority of the population. It will be very interesting to see the outcome of this auction.

[Posted at the SpookyWeather blog, October 10th, 2008.]

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