I received quite a few panicky emails about this settlement process being a potential disaster. Crisis averted:

"Hundreds of traders who placed bets on Lehman Brothers’ creditworthiness before it went bankrupt have settled their positions “without incident,” according to a company that tracks derivatives contracts.

The company, Depository Trust & Clearing Corporation, processes large numbers of investment transactions. It said that only $5.2 billion had to change hands for all the traders to close out their positions, a much smaller amount than had been predicted a week ago.

The settlement process had been seen as a major test of the market for credit-default swaps, and whether it could handle the unprecedented stress of a big Wall Street firm going bankrupt. The overall system appears to have borne the shock successfully, although individual firms might have taken painful losses they have not yet disclosed.

At the same time, the contrast between this week’s orderly settlement process and last month’s financial turmoil, which also involved credit-default swaps, raised anew policy questions over the market for credit derivatives and its failure to limit systemic risk. Because the swaps are private contracts between two parties, there is still almost no information in the public domain over who holds which positions, or who might be left teetering the next time there is a major default."

Go figure . . .


Tracking Firm Says Bets Placed on Lehman Have Been Quietly Settled
NYT October 22, 2008

Category: Derivatives, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “Lehman Credit-Default Swaps Settle “Without Incident””

  1. leftback says:

    A bit disappointing for all of the EOW scenario guys. I guess a complete meltdown of the world economy has been averted for another 15 minutes. BTW, look out for that asteroid behind you, Barry, and happy belated birthday.

  2. SINGER says:

    I wonder if this is true?

  3. SINGER says:

    I wonder if this is true?

  4. Swed says:

    To good to be true, he?
    I have a hunch that this race to liquidity faster, faster had something to do with the settlements.

    How come our regulated mortgage security market is going for anarchy, while unregulated CDO:s market settle in a orderly fashion.

    Where they better att-demanding collateral in CDO market?
    Maybe collateral were in some cases mortgage backed securities?

    The most sane would be to have government bonds as collateral same maturity as the contract. But if mortgage backed were almost as good as government bonds, especially if you write an insurance against a company that hopefully has nothing to do with houses. (who does not?)

    Collateral posted falls in value all over the system. No cash could be raised in order to make due the insurance payment in case of default. The seller of CDO don’t want to sell mortgage backed assets at fire sale prices, so cash is king.
    And the Fed does have cash.

    Just some thoughts out of the blue. I could be wrong 180 degrees.

  5. JP says:

    BR or anybody: Maybe a readout on the failed trades might be useful before declaring that no problems have been encountered:

    pdf from DTCC: http://tinyurl.com/6f84eu

  6. Chris says:

    I am a bit murky on all this jargon, but it strikes me that the settlement process here is for standardized CDS. Is the same process that settles OTC derivatives? I was under the impression that OTC derivatives had no regulatory oversight or clearing agency. Therefore, how could entities like “Depository Trust & Clearing Corporation” have any role in settling OTC derivatives?

  7. Anonymous says:

    I do not buy that CDS payout of net $5 or 6 billion ONLY changed hands.
    The net loss of Lehman bonds is like $130 billion (9% recovery on $150 billion bonds)
    There is an overhang of about 250 billion within about 400 Billion CDS on these bonds.
    It is highly likely, that the 150 billion Lehman bonds were FULLY insured, plus possible unhedged NAKED CDS.
    Therefore SOMEBODY has already paid, or will pay NET $130 billion of insurance,
    6 billion must be taken as a manipulating number.
    Actually it has been said, that these huge CDS payout losses have already been taking before the auction.

    Could this have something to do with the $128 billion from the government that circled into JPM and Lehman after the day of Lehman’s bancruptcy?

  8. Alan Greenspan says:

    And your reason for believing anything said by anyone in the financial markets?

    In the immortal words of George Bush: “Fool me once shame on. . .[waiting for prompt from earpiece]. . . you? Because you see if ya fool me ya can’t fool me again.”

  9. Mark says:

    What happened was they already took their losses a long time ago. So if you wrote the CDS then you basically ‘bought it back’ by buying it from someone else. Now your positions cancel out on the settlement date. But you took your loss because you had to pay a lot more to buy the CDS then you got when you originally wrote it.

    Also why there was more outstanding CDS over the actual amount of lehman bonds outstanding.

  10. Charles says:

    Hi Mark,

    As to your first question, I think you’re not getting how netting actually works.

    As to your second, you don’t need to own the bond to enter into a CDS. I really recommend you read the two articles I posted above. They address both of your points.