Lehman CDS sale at 9.2 cents on the dollar

[ricket]

Just stated on CNBC that the sale went for ~9.75 cents on the dollar...


:eek:

[friendly_jacek]

Re: Lehman CDS sale at 9.2 cents on the dollar

is it good or bad?

[pescamaaan]

Re: Lehman CDS sale at 9.2 cents on the dollar

what does this mean exactly?

1. the debt that the cds is to insure is valued at $.092 and thus the writer of the cds must pay out the other $.908?
2. the cds that lehman wrote will pay out $.092?
3. cds on lehman debt are valued at $.092 and thus didn't provide the protection they were supposed to?

[ricket]

Re: Lehman CDS sale at 9.2 cents on the dollar

It means that anyone who had assets tied to the Lehman Brother's CDS debt is going to lose 90 cents for every dollar invested.

This is going to put a huge, final, and realized hole into the balance sheets of any entity that had exposure to these Lehman swaps.

[grapejelly]

Re: Lehman CDS sale at 9.2 cents on the dollar

I thought that it might mean anyone who issued CDS on LEhman debt would now owe 90 cents on the dollar to those "insured" who were the beneficiaries of the CDS. Am I missing something? This is very confusing...

[ricket]

Re: Lehman CDS sale at 9.2 cents on the dollar

I thought that it might mean anyone who issued CDS on LEhman debt would now owe 90 cents on the dollar to those "insured" who were the beneficiaries of the CDS. Am I missing something? This is very confusing...

No, you're right. As in since they'll be "paying out" 90 cents on the dollar, it will blow a humongous hole in any entities' balance sheets who had exposure to these swaps.

[blazespinnaker]

Re: Lehman CDS sale at 9.2 cents on the dollar

No, you're right. As in since they'll be "paying out" 90 cents on the dollar, it will blow a humongous hole in any entities' balance sheets who had exposure to these swaps.

This should all be priced in, one would hope. The problem is the unimaginable consequences to such an event.

[thomaspaine]

Re: Lehman CDS sale at 9.2 cents on the dollar

Question is do the underwriters have the cash to cover 90 cents on the dollar?

If not, we may see dominoes... I.E. JP Morgan unable to pay, goes bankrupt, causing CDS settlement on THEIR paper, causing another and another etc.....

[grapejelly]

Re: Lehman CDS sale at 9.2 cents on the dollar

This should all be priced in, one would hope. The problem is the unimaginable consequences to such an event.

they are not priced in. We all know that the risks were laid off on another counter party. Who laid it off to someone else.

The problem is that individually this can make sense. But after a bit, it doesn't because the risk models that they use do not realistically price in the chances of complete systemic breakdown. Taleb has shown this quite clearly.

As he says in a paper, take a security that pays some sort of return, say a nickel, every day for 1000 days. Then on the 1001th day it is worth nothing.

The risk models do not take this into account. But nobody cared. Because

1. they figured they had a central bank backstop

2. they are managers or employees, caretakers who are not using their own capital as they used to in the old days when banks and investment banks were general partnerships

It's two forms of moral hazard. In the old days, Lehman would never have done the risky things they did. But with the new business form and the new unlimited willingness by the banks to lend (because of the central banks) this went on until indeed the systemic risk kicked in.

Nobody's risk models were tuned this way. But you or I would never have done a crazy thing like insure debts either.

[*T*]

Re: Lehman CDS sale at 9.2 cents on the dollar

The big underwriters include AIG(!), JPM and other banks. The dominos are lined up. Lehman's was the first domino.

[jimmygu3]

Re: Lehman CDS sale at 9.2 cents on the dollar

No, you're right. As in since they'll be "paying out" 90 cents on the dollar, it will blow a humongous hole in any entities' balance sheets who had exposure to these swaps.

Bloomberg story:
http://www.bloomberg.com/apps/news?p...l.U&refer=news

CDS education from Wiki:
http://en.wikipedia.org/wiki/Credit_Default_Swap

I think I get it. "A" buys Lehman paper and insures it against default with a CDS from "B". Lehman goes bankrupt and the paper is auctioned at 9.25 cents on the dollar, leaving A with a balance due of 90.75% from B.

The question now becomes: Can B pay? What assets will need to be sold in order to pay? Am I correct in thinking that the "in the money" CDSs will trade at a discount to the settlement amount due to counterparty risk? Could the whole CDS market deflate as a wave of defaults renders many of the instruments worthless or significantly depreciated? Will much of the notional value of $60T vaporize just like the fictitious value in the tech & housing bubbles?