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Commentary

What happens to WaMu CDS?

So Washington Mutual goes belly up. JP Morgan acquires its assets. Meaning, depositors are safe – JPM guarantees them. Loans from WaMu will now be paid to JPM.

But it has a hugely negative effect on liabilities – meaning, people who are owed money by WaMu. Shares are going to zero of course. But so are bondholders, senior or subordinated, and preferred if any

WaMu had a ton of CDS on it – trading at high prices, but not quite at 100% so what happens? The CDS writers will have to pay. And pay big.

AIG went belly up after Lehman – I don’t know if that is correlative but AIG did have a lot of CDS on LEH.

Who has a lot of CDS exposure to WaMu? We won’t know as of now because this stuff is OTC, traded in secret. Damn, why aren’t these things exchange traded? All this will do is create panic. No one knows, and information asymmetry means people will back off.

This is going to be bad for the likes of Ambac and MBIA who are known to do CDS deals. And bad, perhaps, for every other bank in town just as a consequence. This “bailout” business – it does nothing to address that. More drama. Coming soon, to a news channel near you.