Lehman Failure May Spark Record Payout for Credit Swap Sellers

Lehman Failure May Spark Record Payout for Credit Swap Sellers

www.bloomberg.com

The collapse of Lehman Brosmay force sellers of credit-default swaps including Pacific Investment Management Co. to make the biggest ever payout in the $55 trillion market.

An auction to be held today will determine the size of the payments buyers of default protection can claim after New York based Lehman filed for the largest bankruptcy with $618 billion in debt.

(visit the link for the full news article)



Related AboveTopSecret.com Discussion Threads:
Fannie, Freddie CDS auction timeline
Why the Worlds Major Banks are on the Verge of Collapse

Please see the above two links to ATS threads for complete explanations of Credit Default Swaps.

At 10am EST today, "Insurers" of Lehman's debts will find out officially how much they owe in payouts. Currently it is believed that "Insurers" will be on the hook for 80-90% of insured losses.

An estimated $400B in Lehman debt is covered by CDS contracts, though with the market unregulated and decentralized, the final damage will not be certain until after the auction has taken place.

www.bloomberg.com
(visit the link for the full news article)

The CDS auction is beginning now. Initial results will be available here in about 20 minutes.

This is actually a very important key that will determine what the major indices may do today.

Pending these results, it could be catastrophic, OR actually turn out to be a decent day for the markets. My guess is that investor sentiment will be positive today simply due to the Washington Financial head's meeting this weekend.

We'll see!


AB1

Good lord.
Initial results are that recovery amount is ~$.0975 on the dollar. If that holds, this is going to be a biiiiiiig payout.

reply to post by anachryon


Jesus, that would seriously be catastrophic! It simply can't be held up...I'm thinking that even if it reflects the total payout, it would be 'red-taped' so long in proceedings that (in this case a good thing) may not have the huge effect it otherwise could.

The above is just some wishful thinking, I'm not even buying it myself lol


AB1

reply to post by alphabetaone


The Dow is tanking hard on the news...remember that Fannie/Freddie was gov't backed, so it had a lot more recovery value. Lehman is wild, flapping in the wind, and everyone knows it.
That number is catastrophic, and there are not enough willing buyers for the debt at bid price. There's an excess $5B. The number will probably not improve much.

reply to post by anachryon


Absolutely right.

And you know what the REALLY sad part is? With this "rescue package", if they would simply just decide to recapitalize the friggin LENDING institutions instead of trying to value a valueless set of assets, maybe, JUST MAYBE the interbank sentiment would start to ease it's own dubious mindset.

--sigh--


AB1

anachyron,

You beat me to the post. I was going to post the same thing. OMG we are in big trouble with Lehman's debt. As you have stated, the preliminary results from the auctions are that Lehman's debt is worth 9.25 cents on the dollar. That means the counterparties for Lehman would be on the hook for 90.75 cents on the dollar on their hundreds of billions of debt.

Just wow. The DOW is down 266 at 8332 as I type. If Lehman's CDS auction settles in that ballpark, we'll be testing our lows of the day by the end of this trading session.

[edit on 10-10-2008 by SeekingAlpha]

[edit on 10-10-2008 by SeekingAlpha]

Wamu is going to be the next bomb that drops next week. I can't imagine Wamu CDS situation being much better than Lehman.

Final Price: 8.625

Final results are posted and the news is not good.

Reuters

Sellers of protection on bankrupt Lehman Brothers will have to pay out 91.375 percent of the insurance they sold, based on the results of an auction on Friday to determine the value of the credit default swaps.

The final value of the contracts, which are estimated to be around $400 billion in volume, will be 8.625 percent, according to results published by auction administrators Creditex and Markit.

$365.5 BILLION in payouts if the contract estimates are correct.
THREE HUNDRED AND SIXTY FIVE BILLION, FIVE HUNDRED MILLION DOLLARS.

Well hopefully Paulson will take some of the tax money he stole from us and use it here where it makes sense to..

What does all that mean in laymen's terms?

It means that all the banks that did credit debt swaps with Loser Brothers have to pitch in that amount of money to cover their debt. So UBS, RBS, and all of the other banks get to pitch in the 365 billion as their notes have been called due, which means they will call their notes due so what is really going on is a mass movement of cash, from one institution to another until this whole thing unwinds. So in my personal opinion... Turn over the folks who worked for Loser Brothers to the Chinese, we'll read about their executions in the news next week..

What it really means, is that the Insurance companies who INSURED those CDS's are on the hook for 365 billion 500 million dollars.

And this is just Lehman exposure. Part II to ensue shortly I would imagine.

Sad....


AB1

wow this IS big news. .08 on the dollar. Wow if these suckers would of just settled with me on my house for .50 on the dollar I would of been happy and they would of been a whole lot better. The fact is NONE of these banks wanted to work with anyone so now they are paying the price. Fark em.

Look at the censorship regarding this topic. I cannot believe this is not the #1 story on CNBC. Over $300 billion in payouts for Lehman is a crippling blow to the global market.

It's a damn shame this story is being censored by the mainstream media.

The rumour was that it would be circa $400bn, and that was enough to make the markets behave as they did today. Not that is certain... wellll...

I'm just seing Darling on the TV. I wouldn't trust him to be able to run a sweet's shop, let alone the UK's economy.

Originally posted by SeekingAlpha
Look at the censorship regarding this topic. I cannot believe this is not the #1 story on CNBC. Over $300 billion in payouts for Lehman is a crippling blow to the global market.

It's a damn shame this story is being censored by the mainstream media.

You are right and I was thinking the same exact thing. Dont think they dont do this on purpose either. This is why GS is sinking. I couldnt figure out how GS was trading at $85 a share but now I know. I know they were exposed to a lot of this junk. Hey why let the peons in on the good stuff to make money right?