Thursday, October 9, 2008

Credit Default Swaps, Lehman Brothers and Collapsing Hedge Funds

UPDATE: We have quite a few posts on Lehman. Use the 'Blog Search' box, keyword Lehman or keyword hedge.
Original post:
Two parts. First from MarketBeat:

The Looming Lehman CDS Unwind

On the heels of similar auction processes for Fannie Mae, Freddie Mac and Washington Mutual late last month will be the expected Friday settlement for buyers of about $400 billion of protection on Lehman Brothers debt.

For now, traders in the equity market are concerned about the prospects for the settlement, adding that its uncertainty is casting a dark cloud over the most likely holders of the debt — big banks such as Morgan Stanley, Goldman Sachs and J.P. Morgan Chase.

This Lehman credit default swaps settlement auction will likely be one of the most expensive payouts in the history of that market...MORE
and from PBS's NewsHour, one of my favorite financial journalists, Paul Solmon:

Originally Aired: October 7, 2008
Risky Credit Default Swaps Linked to Financial Troubles

PAUL SOLMAN, NewsHour Economics Correspondent: Credit default swaps, these paper contracts turn out to be a key culprit in the current crisis, implicated in the demise of the giant brokerage company Bear Stearns, the giant insurer AIG, and perhaps more giants to come.

As of last year, according to an industry group, there were not $62 million, not $62 billion, but $62 trillion worth of credit default swaps out there. That's more than four times as much as the GDP of the entire U.S. economy.

But what are these things? In essence, they're just insurance contracts that pay off in the event of a disaster, a credit default.

But before explaining any further, a brief reminder as to why any of us in the NewsHour community might buy insurance, because, as we've learned from childhood, life is full of risks.

A flood or fire could destroy our house, at the very least costing us a fortune. We could have a motor vehicle accident, another pretty penny. A bad fall? And without health insurance, where would we be?


CARTOON CHARACTER: Mr. Magoo, my name is Tire Biter, the fly-by-night insurance company....

MORE, including the video for the whole Solmon effect. It's very good.