The King Report
M. Ramsey King Securities, Inc.
Tuesday August 26, 2008 – Issue 3939 "Independent View of the News"

In yesterday’s missive we labored to illustrate that KDB-Lehman was overhyped on Friday.

On Monday, Jun Kwang-woo, chairman of the Financial Services Commission, South Korea’s chief financial regulator, asserted that Korea Development Bank should take a "cautious" approach in acquiring an overseas bank. Down goes Lehman! – taking the stock market with it.

JP Morgan warned that it would write-down the value of its $1.2bn of preferred shares in Fannie and Freddie by $600m (50%).

We are astonished that no one picked up on Gretchen Morgenson’s NY Times story that there are $62 trillion in CDS written on Fannie and Freddie debt. We highlighted it yesterday because it is profound.

If Fannie and Freddie defaulted on their debt, there would be trillions of dollars in damage to the financial system due to exploding derivatives. Most people realize this, even if they choose to ignore it.

But what most people don’t realize is if Hank bails out Fannie and Freddie, the CDS might be wiped out, causing unfathomable damage, enormous losses, to firms that bought the CDS. According to Ms. Morgenson, $2 trillion of the $62 trillion in Fannie and Freddie derivatives are "fair value" as on 12/2007.

http://www.nytimes.com/2008/08/24/bu...

GASB (Governmental Accounting Standards Board): In the case of derivatives, fair value generally is the price at which the derivative can be terminated.



http://www.gasb.org/newsletter/deriv...