Lehman Failure May Spark Record Payout for Credit Swap Sellers

NY Times

Whether those claims can or will be paid, and the financial repercussions that could follow if they are not, will signify the biggest test yet for the vast, unregulated market in credit-default swaps.

The danger is that the claims on the Lehman default are so large — they are estimated at $400 billion to $600 billion — that settling them could leave some companies with large, perhaps even crippling, losses and heighten the turmoil in the financial markets.

The claims appear to be even larger than previously thought!

Another interesting tidbit of information comes from the following story:
CBS

Today, the same commercial banking heavyweights thought to be the most safe, JPMorgan, Citigroup Inc. and Bank of America, hold 92 percent of all the disclosed credit derivative contracts, according to the Office of the Comptroller of the Currency.

But that number is merely an estimate because the overwhelming majority of these contracts are unregulated - private, mostly undisclosed and difficult to measure.

In addition to those big names, AIG holds a huge amount of CDS contracts and that practice is a large part of its downfall.

I'm still trying to understand....
how can a derivative/CDS (etc) player like the OP corp.
have a stock value of say $1.00 after losing say $40bn in value....

can the surviving CDSs & other (faintly related to mortgages) derivatives
be worth nearly 100% of the inflated value which the now bankrupt corp.
valued them at ??
If they retained their realistic value---then the Lehmans of the world would not have gone bankrupt!


And the Paulson Plan is adamant, nay fanatical ! on getting near 100% payouts on the 'cash-for-trash'.... then insult the taxpayers intelligence by suggesting >>> 'There will be profit to be had... when the paper 'Matures'"




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why do my posts continually have 1/3 of their content & talking points omitted ????



[edit on 11-10-2008 by St Udio]

reply to post by St Udio


It's an insurance-type contract on an amount of debt. If I make a $100k mortgage to you, for example, I would go to Bob's CDS Shop and make a contract with Bob to pay him say $1000 per quarter to insure that mortgage against default. Bob takes my $4000 per year and hopes you keep paying your mortgage so he can keep the cash.
When you default on your mortgage, I go to Bob and demand my $100k.

Since these type of CDS contracts are on a bank's entirety of debt, the stock price of the company doesn't come into play. It's all about the estimated recovery value of that debt. In Lehman's case, it was determined via auction that various firms believe they can recover $.08625 per dollar of debt (via home foreclosure, selling the securities, etc) - showing that Lehman Bros held a tremendous amount of BAD debt.

Can the recovery rate be higher, close to 100%? Yes, if the debt is good debt, or if the debt is backed up by the government. Companies with good debt, though, don't usually fail in a spectacular way.

The Paulson Plan won't "recover" at 100% or profit...not in our generation. Perhaps if they hold on to the crap mortgages they buy, the home values will go back up in 20 or 30 years...then they could break even. Of course, inflation will have affected things by that point, so, well...

Link to PDF (please note this is a PDF file and users on slower computers may want to proceed with caution)

With regard to failed trades, as per MBSD Important Notice MBS183.08, member firms were asked to submit a MBSD Liquidation Template for those failed items that were liquidated in order to establish the associated profit and losses.

Please furnish this information by close of business Thursday, October 23rd. Upon final review of these documents, FICC will announce the processing date of the appropriate COI entries.

What this means is that there are outstanding "contracts" that have not been paid, and the paperwork (or payments) must be completed by the end of the business day Thursday. No word yet as to WHO failed to pay up. If the figures are significant, we may not know the who until they themselves fail.

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In addition, on Thursday 10/23 the CDS auction for Washington Mutual will be held. Results will be posted here - initial findings at 10:30am EST and final results at 2pm EST.
The losses for the WaMu auction aren't expected to be anywhere near as bad as Lehman's; estimates right now expect a recovery amount of $.60-.70 on the dollar.