Alea

the sub px higher than sr? is that due to the higher coupons or some other subtlety I am missing?

Looks like they tried to minimize the payout at the same time look like they were trying to run a fair auction.

I just re-checked the deliverables list and can confirm that both the FNM/FRE senior had a small supply (2 bonds each) of zero coupon deliverables, so the senior final prices was downward biased because of that. There are no zero sub.

The sellers of protection will pay 100-R for cash settlements based on the auction prices, where R is 91.5 or 99.9 as the case may be. Won’t bring down the economy. ( Bernanke is taking care of that)

Also, does the good deal which CDS sellers got regarding Freddie and Fannie have to do with government backing? Or was this strictly a free-market auction.

Thanks!

Jck, how does Beard “take care”? Wrere the auctions possibly manipulated?

Ok, gotcha, grazie mille…

barry:
not “all” trade above par, almost all.
there are over 300 bonds deliverables and you only need one below par to move the settlement prices below par.

barry:
first i am all for the cme/citadel platform, i don’t think a clearing system run by the people who put us into this mess in the first place is acceptable.
for the hedges, it is not the problem, a CDS is nothing more than the credit risk of a bond, and it can be hedged with the cheapest-to-deliver bond out of a basket of eligible deliverables, but that’s not what dealers do, they hedge with other CDS on the same name with the same or different maturities. this is why the large notional is irrelevant, most dealers have zero or near zero exposure to recovery risk, they only have exposure to the risky annuity depending on the default rate, for ex, if you buy a CDS at 200bp and sell another at 300bp, you will earn 100bp as long as the entity doesn’t default and you have no recovery risk. did you see the open interest on the senior?
$12 million on FNM senior, millions not billions…the people who wrote about hundreds of billions ayt risk should be burned at the stake ;_)
fact: most people who write about the CDS market don’t know what they are talking about, don’t have a clue about what “notional” means. a clearing house will put things in perspective, the CDS market net-net is at lot smaller than people think, btw clearing house could work for indices but i am doubtful it will for single name.

the CDS market is a zero sum game, so by construction the sell = buy, long = short etc..you just get a transfer of wealth from the loser to the winner.
by net I mean the people who have an unhedged exposure and that’s where there could be a problem but that net position is very small compared to the gross notional amount, in addition part of the net is held via indices like the CDX or the iTraxx which further reduce risks. consider fnm and fre, if held via the CDX, their total weight is 1.6% and that’s what is lost at 0 recovery, but recovery was in the 90s, so the loss is around 10/15 bp. ballpark figure is that net is around 1 or 2% of gross exposure.
there will never a general call for payment, if you have a hedged position, recovery risk is eliminated and you are left with a risky annuity that will cease if the reference entity experiences a credit event.