One-Two Punch for the Default Swap Market

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A quick update to the last post. This morning I read in Housing Wire that ailing insurance company AIG poses an even bigger threat to the CDS market than Lehman:

AIG sold banks and other investors CDS protection on $441 billion of fixed-income assets, including $57.8 billion in subprime-mortgage related securities. There are likely very few firms with this much exposure into the CDS market...

My snarky comment in the prior post notwithstanding, the folks at the Treasury have to their credit not directly bailed out either Lehman or AIG. (They have stepped up the indirect bailouts, however: the Fed will now be lending more money to more people with more questionable collateral, and word is that they may also cut rates again today.)

But while they are finally turning some pigs away from the trough, the government's frantic interventions to date suggest that they will not sit idly by as things get really out of hand. We shall see.

I haven't gone into much detail on this week's drama because for the most part I'd be rehashing what's already been, uhm, hashed many times over. All the mainstream outlets are covering the issue, but for good up-to-the-minute updates and commentary the folks at the blog Naked Capitalism have been doing an outstanding job.

-- RICH TOSCANO