Synthetic Lehman

We're living life after Lehman. Consider the doctrine of unintended consequences, or maybe simply unforeseen outcomes. Thank God it's Friday and before climbing into the weekend, take a moment to reflect.

Who would have thought, that merely because the principles-based UK regulatory scheme differed from the rules-based US approach, that hedge funds using the New York office for their prime brokerage needs would skate through intact, while those using the London office would become general creditors in the bankruptcy administration, dying at cents of the dollar (pence on the pound?) and of a long wait to get anything at all?

Oh well. Live and learn. Nothing like experiencing a risk to bring it into focus. And a string of hedge fund failures doesn't clog the plumbing or involve systemic risk, right? We can all live the market volatility, right? Something tells me we all have a lot more living, and a lot more learning, ahead of us.Before we move on to more living and learning, though, the Lehman scorpion's tail has one more sting. In some murky backwater, we're having the settlements of the synthetic CDS exposures referenced to Lehman credit but not part of the CDS settlement of CDS written on the bonds themselves at .0841 or whatever it was. Apparently the the notional amounts of the synthetics was about 4x that of the stuff that has been run through the system. Of course, the ISDA assures us that those positions are continuously marked. I guess that means that this is only a liquidity problem and doesn't raise systemic solvency concerns? Very reassuring, that.

But, for the survivors, on to Iceland. Then, coming up soon on a screen near you, General Motors.