| xmas13 |
10-11-2008 03:01 PM |
Lehman Credit-Default Swap Payout Could Climb as High as $365 Billion
http://www.washingtonpost.com/wp-dyn...101003050.html
In what may shape up to be the most expensive payout ever in the credit-default swap market, sellers of insurance against a debt default by Lehman Brothers will have to pay 91.375 cents on the dollar to settle the contracts.
The results of a settlement auction held Friday imply that banks, hedge funds, insurance companies and other writers of the insurance-like swaps would have to come up with as much as $365 billion for buyers of the protection. But many of the firms on the hook may have taken steps to offset their obligations, which could minimize the blow, industry experts said.
Swaps are basically insurance policies bought by investors to protect against an investment such as a corporate bond losing all value if the company falls apart. The unregulated nature of the market, in which investors essentially bet on the likelihood of a default by a bond issuer, makes it impossible to say who owes how much to whom. But it is safe to say that selling default protection through the swaps turned out to be costlier than anticipated.
http://en.wikipedia.org/wiki/Credit_default_swap
A credit default swap (CDS) is a swap contract in which a buyer makes a series of payments to a seller, and in exchange receives the right to a payoff if a credit instrument goes into default or on the occurrence of a specified credit event, for example bankruptcy or restructuring. The associated instrument does not need to be associated with the buyer or the seller of this contract.
http://en.wikipedia.org/wiki/Image:C...lus_ debt.png
Derivative notionals held 2008Q2 was $182 trillion.
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