Falling in the category of significant unintended consequences of the bailout was the event of default triggered in the CDS market by the conservatorship. The ISDA will settle the CDS through cash auctions that will likely take 30 days. It should prove to be nothing more than a back-office nightmare, unless, of course, somebody finds a huge out-trade. Apparently the CDS market has grown exponentially, despite the fact that the settlement process is performed through the use of fax machines rather than electronic confirms. I predict at least a few cases of "No no no! We definitely sold these. We were not buyers! I don't care what your stupid confirm says. Look it doesn't matter that I can't actually find and produce my confirm, my trader says it was a sell and there is no way I'm going to tell him that I can't find the confirm!"
In bizarre and completely unrelated news, UAL declared bankruptcy in 2002. Unfortunately, the story was so compelling that it was posted as a new headline yesterday and picked up by Bloomberg. I suppose it seemed so probable that UAL could file for bankruptcy again, that investors didn't even bother to actually read the story before dumping the stock. UAL adamantly denied the filing and the error was eventually discovered. For savvy traders who were paying attention, there was a small window of opportunity to buy UAL at $3 before trading was halted.
The Lehman saga continues unabated. Reports this morning about KDB officially ending talks about taking a significant stake in the firm are crushing the stock. Lehman's options for a private sector rescue continue to narrow, which means its days are numbered. Something tells me that by the end of the week the enthusiasm surrounding the bailout of Fannie and Freddie will be a distant memory.
