Thu 9 Oct 2008
As an FYI to market watchers, tomorrow might be an important day because of the Lehman CDS settlement. I expect it to be a catalyst for direction, though I’m not sure which direction that might be.
Basically, CDS (credit default swaps) are insurance against a company’s debt (bonds) in the event that the company goes bankrupt. Since Lehman officially went bankrupt, the insurance companies (pronounced: banks) are going to have to pay the CDS holders to offset their losses in the underlying bonds.
The rumors are that the CDS settlement will likely cause $360 billion in payment. Notice that MER, BX, and MS were all down about 25% today, potentially in anticipation of tomorrow’s settlement. AIG, JPM, BAC, and GS are probably also involved somehow… you may have noticed the headlines about AIG needing an additional $37 billion loan from the Fed… think the timing is coincidence?
Isn’t de-leveraging fun?
Source: Reuters
October 12th, 2008 at 11:12 am
More on the CDS settle will happen on 10/21. Dealbreaker comments:
“Further, because CDS contracts are OTC arrangements, there’s no central clearing party. Lehman might, for instance, be a counter-party in several of the transactions.
Somewhere out there, $350 billion or so in cash is going to have to be raised, which might go a long way to explaining the liquidity issues floating around these last many days.”
http://dealbreaker.com/2008/10/halloween-comes-10-days-early.php
October 12th, 2008 at 12:13 pm
A similar threat… if GM and Ford are destined for bankruptcy, this LEH CDS settle will be a small potato. There is over $1 trillion in CDS insurance against GM’s debt.
Bond holders tend to be the buyers of CDS insurance, and they receive the payout when the bonds default. Who do you think is going to be paying up on the GM bonds when they go bankrupt?
Think about that when you hear about the Treasury nationalizing the brokers (or banks)… and think about how GM is now too big to fail, and will ultimately be backed by the US government, whether as an ongoing business or as insurance on bond default.