Economic D-Day: Friday October 10 @ 2pm

[endthewar]

Or at least that what it looks like to me. Friday is the scheduled reverse auction for Lehman's credit default swaps. It seems like the banks are still hoarding cash, probably waiting to see what the result of this reverse auction will be.

http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0841811720081008

"The value of credit default swaps backed by defaulted Lehman Brothers bonds will be set on Friday, with protection sellers expected to face massive losses of around 90 percent of the insurance they sold.

Twenty-two dealers will participate in the auctions, which will determine how much protection sellers will recover after paying out the insurance. The timeline for the auctions follows, according to JPMorgan.

9:45 a.m.-10 a.m. Auction participants will submit bids and offers for the debt backing the credit default swaps, which will be used to determine the initial recovery rate of the swaps.

10:30 a.m. Auction administrators Creditex and Markit will publish the initial recovery price and the open interest for the contracts will be published. The open interest reflects the amount of bids and offers that have been made, and will show if there are more buyers than sellers, or vice versa.

12:45 p.m. -1 p.m. Participating dealers will submit limit orders for the debt on behalf of themselves and their clients to fill the open interest

2 p.m. The final price of the auction will be published."

So it looks like we can tune it at around 2pm Friday to see if the stock market is going to completely tank or start to recover.

[lib2DaBone]

1. Unemployment Extention Expires..Bush says Jobless Claims drop from 7 year high

I think you are right about Friday. Could be a fatal shot. In the meantime.. today the Labor Dept reports that:
-------------
WASHINGTON (AP) -- New applications for unemployment benefits dropped last week from a seven-year high, the Labor Department said Thursday, though they remain at elevated levels that indicate recession. http://biz.yahoo.com/ap/081009/economy.html
--------------

What they forgot to mention is that the 13 week extention of unemployment benefits (passed back in August) .. ran out this week. So millions of people dropped of the unemployment roles.

This just in from from Bush: "Water is wet.." ! Film at 11.

[MadrasT]

2. Tomorrow is the big day, for sure.

K&R

:kick:

[ProgressiveEconomist]

3. $400B in CDS 'insurance' payments owed for Lehman's credit-based securities is HUGE.

IMO, this obligation, plus fear of runs on banks by frightened depositors, may account for most of the hoarding of bank cash. If I'm right, and if all goes well, the credit crisis may ease a bit next week--for how long, nobody knows.

From http://ftalphaville.ft.com/blog/2008/10/06/16686/the-450-billion-payout :

"The $450 billion payout, by Felix Salmon 10/06/08

Panmure Gordon¡s Sandy Chen has this to say in a note out today: FT Alphaville » Blog Archive » The $450 billion payout

We think one of the key drivers has been the tremendous potential demand for cash from counterparties, related to the CDS (credit default swap) payouts on the recent major credit events. To recap, the FNM/FRE CDS settlement auction happens today (6 October), the LEH auction on 10 October (Friday), and WaMu on 23 October. In these settlement auctions, the reference price for the underlying bonds will be set, thus determining the payout levels.

We think that the CDS payouts related to these credit events will put tremendous strains on the financial counterparties that had written those CDS. We broadly estimate there could be US$50bn of payouts related to FNM/FRE CDS, and US$400bn of payouts related to LEH CDS. We think it highly likely that many counterparties, particularly hedge funds, will not be able to raise the cash to meet their ends of these bargains.

What will this mean? More failures amongst hedge funds, insurance companies and banks, and - given that CDS are largely OTC, meaning that there is limited visibility beyond the immediate counterparty - a lack of trust that translates into money markets remaining effectively shut. And whichever measure of financial stress/lack of liquidity is used - LIBOR-BaseRate gap, TED spread etc - it will remain at elevated levels as long as markets are worried about possible failures of counterparties (or counterparties¡ counterparties).

How cheery. But Chen is making a very good point. Counterparties may have protected themselves from one or two bankruptcies in the system but they would likely not have anticipated failure on the scale seen recently. For instance, if you bought a CDS to protect you on AIG but you bought it from Lehman Brothers, you're not protected. If you were smart you might have bought protection on Lehman from someone else, but you can't keep going forever. ..."

[Delphinus]

4. Plus,

the banks and stock markets are closed on Monday - that will help prolong the angst.

[SammyWinstonJack]

5. ...

:kick: