Friday, October 10, 2008

Early Results Published in Lehman Swaps Auction

Less than a dime on the dollar. Or 9.75 cents, to be exact.

That was the initial consensus about what a Lehman Brothers bond might be worth, judging from the early results of a highly anticipated auction to settle derivatives related to those bonds. Friday’s auction was intended to set the price for what is expected to be one of the largest payouts in the (relatively short) history of credit default swaps.

Hundreds of billions of dollars could change hands. Some have expressed concerns that the Lehman-related swap payouts could overwhelm some of the firms that are on the hook.

Wall Street’s biggest names entered bids in Friday’s auction, including Citigroup, Goldman Sachs, Morgan Stanley, Merrill Lynch and UBS, according a Web site run by Creditex Group and Markit Group, which are overseeing the auction.

What does this figure of 9.75 cents mean?

It means that the financial firms, hedge funds and insurance companies that were on the losing side of these Lehman credit default swaps — that is, the ones that must pay now that Lehman has filed for bankruptcy protection — would need to turn over about 90.25 cents on the dollar to the party on the other side of the trade. That’s $1 minus the agreed-upon value of the underlying bond.

That payout rate is a bit steeper than some might have expected. Lehman’s bonds were recently trading at about 13 cents or so, Bloomberg News reported, which would imply a net payout of 87 cents on the dollar.

The bidding process was scheduled to continue for a few hours, and the final settlement price could change.

More important than the price, though, will be learning the total amount of Lehman credit default swaps out there — and the names of the firms on the losing end of those contracts.

In part because there’s essentially no regulation of credit default swaps, these key points are still a mystery.

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Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.