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Lehman Brother Holdings Inc. credit default swap auction will be the largest payout in the market. According to Bloomberg, sellers of credit default protection on Lehman Brothers are
facing losses around 90.25%. A final price will be announced at 2 p.m.
During an auction Friday morning, a value was determined for the settlement on Lehman credit default swaps. The initial value was set at 9.75 cents on the dollar for the debt, according to Creditfixings.com. There were reports that it would be 12 cents to 13 cents Thursday, and The Big Picture reported 10 cents on the dollar. There is an estimated $400 billion worth of Lehman credit derivatives. The net open interest to sell the debt is $4.92 billion, according to Reuters.
Lehman's $128 billion of bonds were trading around 13 cents on the dollar, "suggesting credit swap sellers may have to pay 87 cents on the dollar to the buyers of default protection," according to Daily FX. The Bloomberg report suggests that over 350 banks and investors are involved in settling the CDSs tied to Lehman, but since there was no exchange or system in place the list of participants was foggy as were the stakes. The list of auction participants includes Pacific Investment Management Co., Citadel Investment Group LLC and American International Group Inc. The investment banking assets that had supported the debt were purchased by Barclays Bank plc after the bankruptcy. Bloomberg reported that, "The Pimco Total Return Fund had written protection on $105.4 million face" and, "a unit of Primus Guaranty Ltd.said last month it guaranteed $80 million of Lehman debt." Plus, "Primus said last week it had $820 million in cash and liquid investments to meet claims on the contracts," the report said. The auction of the CDSs may be what is causing the credit markets to remained frozen despite government's efforts to help the markets recover. Rumors were that banks were hording money to prepare for the payouts. - Maria Woehr See Dealscape: Lehman's unwinding begins See Dealscape: Fed meets to advance CDS clearinghouse Categories Deal Video
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