Lehman’s massive debt swaps settle smoothly
A settlement in billions of dollars in Lehman Brothers credit-default swaps finalized without any big hitches, an industry clearing organization said Tuesday, adding a note of support to the recent recovery in credit markets.
“The liquidation process for forward open commitments involving Lehman has been completed,” said the Fixed Income Clearing Corporation, a unit of the Depository Trust & Clearing Corp., in a notice on its Web site.
It said it was “pleased to announce that no loss allocations will be imposed on [mortgage-backed securities division] member firms as a result of the liquidations of these forward trades.”
The exchange between the buyers and sellers of credit-default swaps, a type of derivative contract that pays out when a company reneges on its debt, had spooked markets Tuesday. Some investors worried sellers would be unable to come up with the cash to pay their counterparties, and these no-shows would usher in a new round of bank or fund failures.
Fears about Lehman CDS deadline overstated
Tuesday’s deadline to settle an estimated $400 billion in credit default swaps on Lehman Brothers failed to trigger feared havoc in the market, and derivatives analysts said the concerns had reflected misunderstandings about the process.
“It seems like a non-event,” said Tim Backshall, chief strategist at Credit Derivatives Research in Walnut Creek, California. “There’s a couple of hedge fund rumors but I am sure they are more general redemption issues than Lehman specific.”
“There’s been a lot of talk about this but I don’t think it’s that material, there has been a lot of misunderstanding,” said Sivan Mahadevan, head of credit derivative and structured credit research at Morgan Stanley in New York. “I think it’s been overdone.”
Note: for an update see:
Success: DTCC Completes Credit Event Processing for Lehman Brothers
Here’s my argument: The reported smoothness of the Lehman CDS settlement is not a totally accurate representation of the ECONOMICS at hand. ISDa reported yesterday that “…a total of $6bn to $8bn is expected to have changed hands by close of business…” on Tuesday. Many are calling Oct 21 a non-event event. I remain curious. What about counterparty risk? Bets like these don’t simply cancel out…though possibly some book-cooking in light of SEC allowances for institutional valuation of THEIR OWN “assets” could delay the unavoidable.
Hasn’t it become crystal clear that Spanky Paulson and his band off merry scumbags will not stop at ANYTHING in order to obfuscate, dissemble, and outright lie to the American people vis-a-vis the current economic crisis? I mean, do any of you guys really believe that Paulson or Bernanke or Bush or Fuld or any of these up-and-comers in the new Amerikan Fascist movement are at all interested in telling the truth???
So, if it is safe to assume that the Paulson plan includes maintenance of “public opinion” to make sure that he and his cohorts can escape Washington before the conflagration begins—than isn’t it also safe to assume that Paulson and his Goering-esque henchmen will do ANYTHING in their power to make sure that there are no more Lehman-like s**t storms during the waning days of the Bush Empire? And if this is true, then won’t these criminals make sure that the Derivative Swap cluster f**k that MUST at some point rear it’s perverted head in the global marketplace—won’t they make sure that this catastrophe doesn’t become public knowledge until AFTER the McCain swearing in???
This from the AP: “…While commercial paper is still generally a safe investment, its risks were highlighted last month as a large money-market fund called the Reserve Primary Fund “broke the buck” — meaning the value of its underlying assets fell below $1 for each investor dollar put in. Investors were exposed to losses after the fund conceded that $785 million it had invested in debt of Lehman Brothers became worthless after the investment bank’s bankruptcy. That instance, and the broad turmoil in markets, have made investors wary of even the smallest risk that a borrower may default…”
Spanky Paulson and his cohort of scumdwellers are evil. They know that another “Lehman moment” is bad for them, and they will not let it happen under their watch. No matter what. No matter what they have to do.
Tom:
thx for the update, we will watch carefully to see if the non-event of yesterday will be the event of today…
and yet
Lehman default swaps still pending, DTCC says
By MarketWatch
Last update: 7:47 p.m. EDT Oct. 21, 2008
Comments: 2
An Oct. 21 MarketWatch report inaccurately reported that the settlement of Lehman Brothers’ credit-default swaps had closed. It is still pending. See corrected story
Lehman default swaps still pending, DTCC says
By MarketWatch
Last update: 11:42 p.m. EDT Oct. 21, 2008
Comments: 117
This update corrects and clarifies that final settlement is still pending.
NEW YORK (MarketWatch) — An industry clearing organization said late Tuesday that it was still awaiting final results from the settlement of Lehman Brothers’ credit-default swaps, a massive financial transfer that would add significant support to a recovery in the credit markets.
The Depository Trust & Clearing Corp. will issue a statement when the settlement is completed, according to spokeswoman Melanie Best. She declined to comment on timing.
Payments under these derivatives contracts have to be made by the close of business Tuesday.
The International Swaps and Derivatives Association, the group that represents swaps dealers, issued a statement just before 6 p.m. Eastern noting the “success” of the Lehman settlement.
“Today’s settlement demonstrates that the industry infrastructure for [credit-default swaps] clearly works,” said Robert Pickel, chief executive of the ISDA.
The exchange between the buyers and sellers of credit-default swaps, a type of derivative contract that pays out when a company reneges on its debt, spooked markets Tuesday. Some investors worriedsellers would be unable to come up with the cash to pay their counterparties, and these no-shows would usher in a new round of bank or fund failures.
This type of domino effect turned what started as a U.S. housing-market collapse into a global credit crisis.
“Settlement of Lehman’s CDS is what has the market on the nervous side,” said Peter Cardillo, chief market economist at Avalon Partners, said earlier Tuesday about the credit-default swaps.
The major U.S. stock indexes briefly scaled back declines late in the session after reports that counterparties had closed the swaps settlement without a hitch. See Market Snapshot.
Global interest rates spiked and lending contracted after Lehman Brothers (LEHMQ: declared bankruptcy in mid-September, a failure that risked taking some of the firm’s numerous trading partners down with it.
The bankruptcy also triggered a relatively rare event in the $50 trillion market for credit-default swaps: the requirement that holders of protection on Lehman debt get paid by the sellers of these swaps.
An Oct. 10 auction determined terms of the payout. Buyers of protection against a Lehman default were slated to receive 91.375 cents for every dollar of Lehman debt they held. See full story.
The overall size of the payout was expected to be as much as $400 billion. But if the counterparties’ offsetting trades are taken into account, the Depository Trust and Clearing Corp. has forecast that sellers of the protection may only have to cough up about $6 billion.
The credit-default swap settlement comes as stressed credit markets showed some early signs of recovery.
The cost of short-term borrowing continued its recent fall Tuesday.
The London interbank offered rate, or Libor, for three-month dollar loans fell to 3.83375% from 4.05875% the previous day. The decline follows a sharp drop of about 35 basis points, or 0.35 of a percentage point, on Monday. See Libor story.
Still, there are more companies at risk of default and more debt outstanding than in several years, and credit-default swaps may cause continued headaches for credit markets, said John Atkins, a fixed-income analyst at IDEAGlobal.
Going forward, “workouts can be much more convoluted,” he added. “This doesn’t mean things can’t go wrong.”
Kudo’s on the call. You nailed the CDS story.