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I made a mistake in posting the title of a recent article "It's about time these guys got tire of losing money" in regards to PIMCO and Bill Gross's investment in GSE MBS. He had a big pay day, and his gambig apparently paid off. Of course, it does look a little fishy, but chances are he made a calculated bet that bore fruit. The conspiracist in me could say he was bailed out too, but kudos to the man for a good call.
Of course, since I am never completely wrong, let's see what may be happening on the many other fronts. From FT.com:
One of the largest defaults in the history of the $62,000bn credit derivatives market has been triggered by the US government’s seizure of Fannie Mae and Freddie Mac, raising questions about how dealers will unwind billions of dollars worth of contracts.
Although the $1,600bn of debt issued by the troubled mortgage groups is regarded as safe after the US government’s move to take control of the companies, their move into “conservatorship” counts as the equivalent of a bankruptcy in the credit derivatives market....
...
The uncertainty surrounding the Fannie Mae and Freddie Mac CDS contacts highlights the need for improved settlement and trading procedures. Already, regulators have put pressure on CDS dealers, including all the large financial institutions, to reduce settlement and trading risks.
The near-collapse of Bear Stearns in March highlighted the extent to which many large financial institutions were linked together through the CDS market, and the Federal Reserve and other regulators want to reduce such systemic financial risks.
The growth of the CDS market over the past decade has outpaced development of settlement systems and trading infrastructure. One worry is the lack of standard procedures in contracts for dealers to agree ways to settle defaulted credit derivatives.
The actual payments on credit default swaps on Fannie Mae and Freddie Mac are expected to be limited because the value of the mortgage agencies’ debt remains high after the US government stepped in to back it.
That means that meeting any claims on CDS may not be that costly, although the details are still being worked out and the impact is unknown.
Analysts at Creditsights said regulators could “use the bail-out as another lever” to enhance the CDS market’s efficiency.
Reference Reggie Middleton says the CDS market represents a "Clear and Present Danger"! and CDS stands for Credit Default Suckers... for what this may portend. This particular event has no significant credit losses, per se, but it does highlight what mish mash the clearing and settle system of CDS currently is. No one knows for sure who gets what to who, when, and how. With the amount of leverage and lack of credit monitoring and risk management rampant among these circles, there is a surprise waiting in the rafters, particularly when
a big S&L or bank such as WaMu goes bust.
WaMu gets its Memorandum of Understanding from the Office of Thrift Supervision. WaMu had to answer in terms of how it will manage its risks, assets and liabilities moving forward without raising more capital. Raising capital for this company is a dead in the water issue. The last set of investors/suckers got burned quite severely and the stock is in the $3 range, down about 88% for the year past.
This is just another nail in the coffin for WM. Their portfolio and risk profile sucks, plain and simple. This company will break the FDIC if it needs to be taken over considering it's insured liabilities are such a large percentage of the FDIC's current capacity given the other bank failures on tap. The FDIC has craftily arranged for no/low premium buyouts of bank assets which have lessened the strain on its own resources, but methink WaMu may be too big a fish to flush down that tiolet.
Just imagine what the prudent (if they're any left) depositors at WaMu will do when they find out that WM got the MoU. Run on the bank anybody??? Would you leave your $500k in with WaMu?
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