The auction to settle Lehman's CDSs will likely be
the second-largest payout on contracts after Fannie Mae and Freddie
Mae. However, Lehman was the first large counterparty in the credit
derivative market to default, and investors have been concerned that
unwiding Lehman's book could equal a lot of confusion and big losses.
There is an estimated $400 billion worth of Lehman credit derivatives,
and Friday they should be all sorted out. Expectations are for Lehman
to settle at 10 cent on the dollar, The Big Picture states. Protection
sellers
expected are estimated to face losses of around 90% of the insurance sold.
Because the
over-the-counter
credit derivatives market is murky, as The Deal's Vipal Monga states, it makes it difficult to know who has what
exposure to Lehman CDSs. The most likely holders of the debt will include big banks such as
Morgan Stanley, Goldman, Sachs & Co. and J.P. Morgan Chase & Co. The banks have been
apparently hoarding cash in preparation for payouts.
Twenty-two dealers will participate in the auctions, according
to Reuters. After that, as
Marketbeat points out, we could see a more stable market within a week or two.
- Maria Woehr
Credit default swaps -- contracts that unraveled Lehman Brothers Holdings Inc. -- will be unwound tomorrow. The Lehman Brothers credit default swaps auction takes place Friday, and as The Big Picture points out the derivatives unwind has been what's roiling markets.
