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Derivatives Bloodbath

GEORGE WASHINGTON [1]
Friday, October 10, 2008

The auction of Lehman’s credit default swap derivatives (CDS) occurred today. The final price bid for Lehman’s CDS was 8.625.

That means that holders of Lehman CDS will have to pay 100 minus 8.625, or 91.375 cents on the dollars.

That equals around $365 billion dollars (since there are around $400 billion in CDS for Lehman).

This is even worse than expected.

As an article on CNBC puts it:

“News that the settlement price might be lower than the 13 cents Lehman bonds have been trading at may have rattled the financial markets today. The theory being that if the sellers of insurance of Lehman bonds had to make a larger payment to protection buyers than previously thought, this might force the protection sellers to liquidate assets (of all kinds and in all asset classes) to raise money for the final settlement.”

(ARTICLE CONTINUES BELOW)

In related news, Bloomberg writes today:

“Credit-default swap indexes around the world soared today on concern the deepening credit crisis will trigger company and bank failures.”
If the government is going to stick its nose in the free market, it should deal with derivatives – the 800 pound gorilla.