Also in this playlist...
This transcript is automatically generated
One of the things that is happening in the market today it's a bit complex so try to -- it out as much like hand.
Is these credit default swaps you hear a lot about that recently BC insurance on companies debt which was this trillion dollar market which one and I AIG.
In a lot of -- trouble some of the swaps that are associated with Lehman Brothers were up for auction pricing today the expectation might be.
They -- go for as little as ten cents on the dollar point is could have a big impact on the overall market in fact it might be having one right now.
Let's talk more about that and other issues facing you from the stock perspective joining us pat Dorsey.
Director of stock analysis at Morningstar was on late with us last night is back on today -- appreciated everybody's working hard these days.
Lehman Brothers listen to complicated topic out there we saw with the bonds did kind of gone through -- smacking -- done.
But to -- the -- do you think the Lehman CDS auction is having any impact on the market today or is this pure psychology pure fear.
I think there's a potential for to have a large impact -- in -- You what will ably described described what -- credit default swap is it's kind of what insurance on a bond there's a very important difference.
You know when you buy insurance and house or car that state former -- -- -- that insurance.
Has to keep cash on the balance sheet -- regulators who say you have to keep -- reserves said if -- put a claim in on my house in my car they can pay me.
Well credit default swaps are unregulated and that means that some of the people selling these insurance policies -- Lehman's bonds.
May not have the cash available to settle these promises that they -- and if they don't.
That means we concealed some very industry turmoil in the markets because it's an unregulated market.
And no one really knows whether the folks who made these promises to pay out if Lehman defaulted.
Actually have the cash to back up the promise and pat it is surprising some of the companies that weren't selling this protection that might be on the look.
A -- for example just one -- day again it it is of that that knock on effects.
Of this and what they might have to pay out it is really another.
It is really unknown and certainly be smarter players in this market who sold its insurance will have the cash to pay out.
Or expert possible they took -- off sitting position perhaps they.
Sold -- this insurance policy Lehman's debt -- the same time shorting a stock so that.
The money they would have to pay out on the bond they made up for by the bet against the stock a Smart player would have an offsetting position.
But it is very likely there were some say hedge funds out there who basically made this -- without having -- off sitting position.
And those are the ones who might have trouble making good and because frankly we've never been here before.
It's an unregulated market we've never had a settlement of this size how it gets resolved is frankly unknown until early this afternoon.
It not to get too complicated but what happened was when the government bailed out Bear Stearns the debt holders didn't lose any money.
And you did not have this unwise.
In the -- default protection that was sold.
But that isn't one of them I -- and that one of the reasons with Lehman Brothers.
That you let -- debt holders lose money and again one of the reasons that it's triggered the panic.
That we've seen in the last few weeks.
That's exactly right -- it was really the fact that the that.
Usually very safe part of the capital structure the bonds was taken out shot frankly was reduced in value tremendously.
That's caused so much of the turmoil so we will see if these players can really make good on the promises that they made.
And as a further complication or it could be that some of the folks selling its insurance.
-- firms like and AIG or like a -- Bear Stearns who frankly.
Aren't around to make good on the contract and it right now.
That's a further complication in this market again.
This is what happens when you have a massive.
Totally unregulated derivatives market roll up under our noses with no one looking at it and no one making sure people can actually make good on their promises.
We just let it all on -- seven billion dollar rescue package -- is passed we haven't begun implementing it yet.
You know what if the market is supposed to anticipate it's anticipating.
Not a lot of help and lets you believe the -- is going to be -- 5000 without it.
Should we even have this plan maybe it's time to -- -- about rescinding it.
Well I mean I think you know I think at this point it's kind of -- Malcolm X strategy to propping up the market by any means necessary.
Itself you know I mean we are in uncharted waters and I don't really have a big issue with the bailout package.
The discussions of -- UK type plan to recapitalize banks -- government purchase of preferred stock I think that has a lot of merit to it.
What we need bottom line is confidence back in the market so banks will lend to each other and lend to companies.
It is very very hard as you know to regulate or legislate confidence and because of that we simply have to keep trying whatever we can't.
Until we get that confidence level back up people willing to lend to each other because until.
Credit begins to flow again to -- that makes the economy go.
We're kind of sputtering at the moment.
All right pat Dorsey of morning star director of stock analysis there pat thank you thanks so much Brian.
Filter by section