Two to go — for now.
Results from the much discussed Fannie and Freddie CDS auction are in:
Fannie Mae Senior -91.51%
Fannie Mae Subordinated - 99.90%
Freddie Mac Senior - 94.00%
Freddie Mac Subordinated - 98.00%
The price (recovery value) was better than that predicted by the likes of JP Morgan (circa 85 - 90 for Fannie Mae and 87 to 92 for Freddie Mac).
So, hey, maybe things aren’t so bad after all!
Of course the GSE’s $1,600bn ‘default’ must be interpreted in the context that Fannie and Freddie’s debts are being explicitly guaranteed by the US government. Thus, the real test may come on Friday when up to $400bn of payouts related to Lehman CDS, and government-guarantee free, are settled.
Naked Shorts has a, err, copy, of an instructional video from the International Swaps and Derivatives Association describing the settlement process for Friday and beyond.
Worth a view.
As for the discrepency between senior and suboordinated above, Alea offers this explanation:
Some people are surprised that the sub recover more than the senior, this is due to the cheapest to deliver effect, both the FNM/FRE senior have zero coupon on the deliverable list, while there are no zero sub.
Related links:
The $450bn payout - FT Alphaville
