Lehman CDS To Be Settled Tomorrow

October 9, 2008 at 2:54 pm  ·  Category: Market Commentary

The impact of a default far outweighs the economic impact of just the debt and equity a company has issued.  When you write derivatives to take exposure and have more people betting, you magnify the impact of a default.

Gregg Berman, Co-Head Risk, RiskMetrics

Citi credit strategist Michael Hampden-Turner recently estimated that $400 billion in credit default swaps has been written on Lehman Brother’s debt.  Tomorrow (Fri) these contracts are going to be settled.  With Lehman debt selling for 10-11 cents on the dollar, the writers of these CDS look like they’ll be on the hook for about $360 billion.  This could potentially push some financial institution over the edge and could be one of the factors that resulted in today’s afternoon crash.

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