Rescue may cost banks, insurers billions in CDS losses

09/11/2008 | Financial Times (free content)

When the U.S. government put Fannie Mae and Freddie Mac into a conservatorship, credit-derivatives contracts treated that as bankruptcy -- thus the contracts must be unwound. Dealers and analysts estimated that there is as much as $500 billion in outstanding contracts, although the exact number is unknown. Because the recovery value of Fannie's and Freddie's credit-default swaps is expected to be roughly 95 cents on the dollar, insurance companies and banks that offered the default protection would be hit with a 5% loss, which calculates to losses of as much as $25 billion.

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