What bank looks the most like Lehman? SocGen. This is the bank that is the principal maker of the derivative book in the world. Consider it the world's largest bookie. It makes odd and strange markets, proprietary trades that are unlisted, with many, many hedge funds.
These hedge funds are watching the ratings agencies and they are getting really nervous. They are thinking, "Unwind these trades before it all goes bad." I am willing to bet that some are taking action right now. SocGen often has to take the other side of the trade to unwind these positions because they either laid off the risk to an account in a long-term contract that can't be undone or they actually own the other side. In either case the bank would have no choice but to position the close out to live up to its obligations of making a market, and that means it is long much more than it thought. Given that it is long these unwound trades against sovereign debt, it could be a loser on both sides.
It is possible that soon no one will want to lend it money because it will be an open secret that this derivative book might be choking them. They could, already, be long tons of really-hard-to-understand positions and, even though they would most likely be buying them back at a considerable haircut to what they are worth, the hedge funds are so afraid of a Lehman scenario that they would be freaking out and whacking any bids.
These hedge funds are watching the ratings agencies and they are getting really nervous. They are thinking, "Unwind these trades before it all goes bad." I am willing to bet that some are taking action right now. SocGen often has to take the other side of the trade to unwind these positions because they either laid off the risk to an account in a long-term contract that can't be undone or they actually own the other side. In either case the bank would have no choice but to position the close out to live up to its obligations of making a market, and that means it is long much more than it thought. Given that it is long these unwound trades against sovereign debt, it could be a loser on both sides.
It is possible that soon no one will want to lend it money because it will be an open secret that this derivative book might be choking them. They could, already, be long tons of really-hard-to-understand positions and, even though they would most likely be buying them back at a considerable haircut to what they are worth, the hedge funds are so afraid of a Lehman scenario that they would be freaking out and whacking any bids.
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