GO
Loading...

WaMu's Credit Default Swaps Price at 57 Cents

An auction to determine the value of Washington Mutual's credit default swaps priced them at $0.57—below the initial price of $0.63625 set in the auction.

What this means is sellers of these swaps, which insure against a bond's default, will pay buyers of the protection $0.43 on the dollar.

TheTruthAboutMortgage

While the final number was less than expected, Tim Backshall chief strategist of Credit Derivatives Research said in an email to CNBC, "..this is still a much higher recovery rate than many expected a few weeks ago (when bonds were down in the 20s)."

The cash settlement date for WaMu's credit default swaps is Nov. 7th. Around that day, the Depository Trust & Clearing Corporation (DTCC), which handles the settlement of these trades, may issue a dollar figure on the payments made by net sellers of the credit default swaps to the net buyers of these contracts. The DTCC has yet to determine if it will make these figures public.

Once the country's largest thrift, Washington Mutual filed for bankruptcy on September 26, 2008. The 119-year-old firm was seized by regulators the day before, after customers withdrew $16 billion dollars from the bank over a ten-day period. JPMorganthen bought the firm's banking operations, paying the FDIC $1.9 billion.

The auction to determine the value of WaMu's credit default swaps is the fifth held by Creditex and Markit in the last two weeks. The other auctions include those pricing the credit default swaps of Fannie Mae , Freddie Mac , and Lehman Brothers.

The previous auctions generated some concern in the market, with investors fearful about the size of the payments the final settlement price would mean for sellers of the credit default swaps. It appears some of these fears may have been overblown.

For example, on Wednesday the DTCC said the settlement of the outstanding trades on Lehman's credit default swaps resulted in payments of $5.2 billion from net sellers of that protection to the net buyers of the protection. Prior to this, much larger numbers were thrown around because some forecasts were based off an estimated notional value of Lehman's CDS of $400 billion.

With the final value of a Lehman CDS put at just over eight cents on the dollar, there had been some estimates the final payments on the Lehman CDS would be over $360 billion. Turns out, those estimates were very wrong.

Backshall says the notional amount of WaMu's credit default swaps is about $90 billion dollars. Looking at prior auctions, the final payments will be far below the $38.7 billion a payment of $0.43 on each dollar of the $90 billion in notional value would suggest.

Industry experts downplay the use of notional numbers to describe the CDS market, maintaining they do not provide an accurate view of the money that is at risk.

With the notional amount being the face value of total contracts outstanding, it does not take into account the fact that a majority of these contracts cancel each other out because sellers of protection usually hedge their bets by buying protection.

The notional number also does not take into account marks a buyer or seller may have taken on a CDS as the value fluctuated, or collateral put aside to cover their CDS holdings.

Banks