Banks, hedge funds and other sellers of protection on Lehman Brothers' (LEHMQ.PK: Quote) debt are facing losses in the area of 90 percent the insurance sold when the value of the failed bank's credit default swaps are settled in an auction on Friday.
If sellers of protection outweigh buyers in the auction, as some analysts expect, losses may be even higher.
Lehman's bankruptcy filing last month sent its bond values plunging as the majority of the investment banking assets that had supported the debt were purchased by Barclays Bank, leaving debt holders at the abandoned holding company with little to reclaim....MORE
From The Big Picture:
(exerpts of a couple Financial Times stories that are now behind the paywall)
From Infectious Greed:
9:45 a.m.-10 a.m. Auction participants will submit bids and offers for the debt backing the credit default swaps, which will be used to determine the initial recovery rate of the swaps.
10:30 a.m. Auction administrators Creditex and Markit will publish the initial recovery price and the open interest for the contracts will be published. The open interest reflects the amount of bids and offers that have been made, and will show if there are more buyers than sellers, or vice versa.
12:45 p.m. -1 p.m. Participating dealers will submit limit orders for the debt on behalf of themselves and their clients to fill the open interest
2 p.m. The final price of the auction will be published....
From MarketBeat:The Looming Lehman CDS Unwind
From Market Movers:
The Unwinding of the Moral Hazard Trade
Some of our earlier LEH CDS posts:
Judgement Day: Lehman's Credit Default Swaps Settled Today
Lehman Defaulted, Now Let's Settle those $400 Billion in Credit Default Swaps
...What will this mean? More failures amongst hedge funds, insurance companies and banks, and - given that CDS are largely OTC, meaning that there is limited visibility beyond the immediate counterparty - a lack of trust that translates into money markets remaining effectively shut. And whichever measure of financial stress/lack of liquidity is used - LIBOR-BaseRate gap, TED spread etc - it will remain at elevated levels as long as markets are worried about possible failures of counterparties (or counterparties’ counterparties)....Let the Bloodbath Begin: Hedge Fund Redemptions