Wednesday, September 17, 2008

Unwinding the credit crunch

I've just read the Credit Crunch Glossary on the BBC site. My got no wonder it's all gone wrong, have you seen what these jokers have been doing!


A lot of the trades carried out by big banks involve agreeing to buy or sell or deliver or receive something on a particular date in the future. You might, for example, pay $10,000 for 100 barrels of a particular type of oil to be delivered in November.

To unwind a position, you just do the opposite of what you did in the first place. So if you bought 100 barrels of oil to be delivered in November then to unwind the position you have to sell someone 100 barrels of oil to be delivered in November. It is very important to unwind a position because otherwise you end up having 100 barrels of oil delivered to your desk, which is embarrassing.

Also, you do not get the $10,000 back or make any profits until you have unwound your position.The problem at Lehman Brothers is that there are all sorts of trades that have been made that will not be unwound because the traders have been laid off. So the challenge for the administrators is to unwind all the positions before they start receiving oil or gold or whatever the traders have been dealing in. This will be an enormous task and the administrators need to try to lose as little money as they can while doing it.

Meanwhile, the banks that have done deals with Lehman don't know when they will get their money back - until all deals have been unwound.

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