Understanding Counter Party Risk As we write this, CNBC is reporting that Lehman Brothers, Inc. (LEH) has a notional amount of outstanding OTC positions of nearly $800 billion.  Since Lehman is going into bankruptcy, what does that mean for the rest of the financial markets? Each of these trades has a counter party, an institution that is expecting to pay off or get paid according to the terms of the agreement. Explaining Counter Parties Let us start with an example that everyone can understand.  Suppose that you occasionally make a  football bet (completely illegal) with an online sports betting service or a local provider of such services.  Since you are a recreational player, your normal unit is $100, an amount less than tickets to a local sports event.  If you lose, you have to sacrifice some fun.  If you win, you can ...

It was another whipsaw session on the Street as stocks staged a late-day rally to pare early losses and finish deep in the green. The Dow climbed 165 points to close at 11,434.

The big surge came in response to word that Lehman Brothers, Inc. (LEH), the beleaguered investment bank, had entered into conversations with possible suitors after Moody's Investors Services said the company needs to find a "stronger financial partner." Lehman has been aggressively pursuing additional capital support as the company suffers from a portfolio of deteriorating assets and mounting losses.

Adding to the gloomy macro-level economic picture was the Commerce Department's report that the national trade deficit grew to its highest level in 16 months in July, climbing 5.7% to $62.2 billion. The reading was worse than analyst projections of $58 billion, driving the deficit between imports and exports to its highest level since March

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It was a brutal day for stocks as the euphoria from the Fannie and Freddie bailout dissipated in response to renewed concerns about weakness in the financial sector. The Dow dropped 280 points to close at 11,231.

Lehman Brothers Inc. (LEH) spooked the market when word spread that the troubled investment bank's negotiations with Korea Development Bank had stalled. Lehman has been aggressively pursuing additional capital in order to provide protection against deteriorating assets and strengthen its balance sheet. Lehman shares were down more than 40% on the day.

The downtrend in the overall market and financial sector was hastened by American Insurance Group, Inc (AIG), as investors speculated that the world's largest insurer would also need to raise more capital to protect itself from exposure to mortgage related assets. AIG has already posted $20 billion in losses over the last three quarters and raised $20

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The market is cheap on earnings.

The subprime issue is contained.

That’s been the mantra. I think the mantra is wrong. While the overall market is not expensive on earnings, certain parts are a lot more expensive than they look. Why? Well the earnings growth estimates are a hoax right now, specifically in the financial sector. Do they really know what’s on their books? Do they really know their exposure? How would they know? Can some of these mortgage companies look into the hearts and minds of their newfound (2005/2006) borrowers and tell who is going to default? I know they exported much of these risks in CDOs to hedge funds, but their is still exposure – but no one knows how much. So their earnings are at serious risk.

The Financial Times this morning:Bank of Korea surprises with rate increaseBy Song Jung-a in SeoulPublished: August 9 2007 06:48 | Last updated: August 9 2007 06:48The Bank of Korea unexpectedly raised its benchmark interest rate by a quarter point to a six-year high of 5 per cent on Thursday to absorb excessive market liquidity and contain growing inflationary pressure.The rate hike, the first ever to follow just a month after a previous hike, surprised South Korea’s financial markets, driving bond prices down and pushing the won higher.Lee Seong-tae, the BoK governor, said strong economic growth and increasing price pressure prompted the central bank to raise interest rates again as financial markets showed signs of instability amid explosive growth in the money supply.South Korea’s economy grew 4.9 per cent in the second quarter, the fastest pace ...