Update: basis risk and credit value adjustments as potential sources of losses

Lots of assets don't have a corresponding index so banks have to mix and match several indexes for your hedges. Some work, some don't.
However when a hedge goes wrong, i.e moves in an adverse direction, you are caught in a situation where you own protection that has cost you more than what's now available in the market place.

Implications
As the value of protections (that you would assume is equivalent to an asset) gets marked to market, hedge-related losses are looking ever more conspicuous as investment banks unveil their results

- Goldman Sachs reported roughly $500 million in losses related to its leveraged-finance positions.
- Lehman Brothers, the big shift in the underlying assets and their corresponding derivative positions played a significant role in its $2.9 billion worth of losses.
- Citigroup on 19-Jun warned of further large writedowns and credit losses in the second quarter
- Morgan Stanley reported $800 million in losses from trading and leveraged loans

Comments:
There's certainly going to be a lot more uncertainty facing the financial markets in the weeks to come. Banks are going to struggle with replacing the record profits made in the yester-years from fixed income structuring with new sources of income. So far, most have jumped onto the Commodities trading bandwagon and Goldman has done particularly well. but with the commodities market fast-becoming crowded and less of an alternative bet to equities/fixed-income, no one knows when the music is going to stop.

Eric Tan, London