Tomorrow's Lehman Auction: Why You Should Care

[AlCzervik]

Tomorrow, the credit default swaps backed by bankrupt investment bank titan Lehman Brothers will be settled.

What does that mean and why should you care?

The credit default swaps -- along with the mortgage-backed securities you've been reading so much about -- were one of the financial instruments at the heart of the current credit crisis.

A credit default swap, or CDS, is essentially an insurance policy against default on a debt. It's explained quite nicely here in this passage from a Time magazine article from March 17 of this year:

"Credit default swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default...The buyer of the credit default insurance pays premiums over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It's supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft.

Except that it doesn't. Banks and insurance companies are regulated; the credit swaps market is not. As a result, contracts can be traded -- or swapped -- from investor to investor without anyone overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults. The instruments can be bought and sold from both ends -- the insured and the insurer.

more at link
Credit default swap

[Subdivisions]

1. I heard somewhere that if this goes bad, so goes the economy. Is that

right?

[AlCzervik]

2. well what we find out tomorrow is roughly how big the bad mortgage market is

at least Lehman's share. Check this part out-

And the Lehman auction tomorrow will do just that: Begin to place a value on the CDSs that had been backed by Lehman.

Because no one is really sure what the Lehman CDSs are worth, there's no way of telling how much the auction will bring. Some fear the CDSs will settle for only pennies on the dollar.

[Subdivisions]

3. That clears it up for me. Thanks. In other words, things could get worse. n/t

[anigbrowl]

9. 0.15/$1 wouldn't surprise me in the least.

Nobody is looking forward to this because those numbers will be applied to everyone else's balance sheets as a rough estimate.

What will be really scary is if there are few or no bids - that'll make the difference between another day of blood on the trading floors and a suspension of trading. If there are no bids in the first 30 minutes, Friday will be an involuntary bank holiday.

[still_one]

4. They aren't regulated because of the Commodities act of 2000, another phil graham gem

The CBOE is what governs options, and you are correct, there could be a lot of pain tomorrow

[AndyA]

5. Phil Gramm = John McCain = Republican Party.

Just to make sure everyone knows. ;)

[AlCzervik]

7. yes and Alan Greenspan loved those shitty mortgages so much he wanted to fuck them.

Everytime i hear that weasel talk about the crisis i want to scream.

[still_one]

8. I feel the same way /nt

[PA Democrat]

10. I wonder if his fans will still call hin "the Oracle"?

[AlCzervik]

11. isn't that what they call Warren Buffett, "The Oracle of Omaha"?

[PA Democrat]

13. I got it from this article:

"Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves."

http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?pagewanted=2&_r=1&hp

Warren Buffet has been much more of an oracle when it comes to this entire mess. He's been warning about derivatives for years.

[Hannah Bell]

12. and whenever i see his wife babbling away on the tv, i want to slap her.

isn't there some conflict of interest there?

silly bitch. g-s is the poster boy for everything wrong in the last 28 years. starting with reagan's phoney "social security rescue" that enabled the tax cuts & bubblation.

[SoCalDem]

6. Quick!! Loan me $10,000..

I simply must go door to door in my neighborhood tomorrow and buy all their garbage (for top dollar, of course) before the Trash men come...

makes as much sense..