Lehman Credit-Swap Auction Sets Payout of 91.38 Cents (Update1)

[bemildred]

Source: Bloomberg

Oct. 10 (Bloomberg) -- Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay holders 91.375 cents on the dollar, setting up the biggest-ever payout in the $55 trillion market.

An auction to determine the size of the settlement on Lehman credit-default swaps set a value of 8.625 cents on the dollar for the debt, according to Creditfixings.com, a Web site run by auction administrators Creditex Group Inc. and Markit Group Ltd. The auction may lead to payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said.

While the potential payout is higher than 87 cents on the dollar suggested by trading in Lehman's bonds yesterday, sellers of protection have probably written down their positions and put up most of the collateral required, said Robert Pickel, head of the International Swaps and Derivatives Association. More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly who has what at stake because there's no central exchange or system for reporting trades.

``I don't think it buries anybody,'' said Brian Yelvington, a strategist at CreditSights Inc., a bond research firm in New York.

Read more: http://www.bloomberg.com/apps/news?pid=20601087&sid=aLkOZnNcDmSQ

[drm604]

1. Okay, I'm totally lost.

Is this good or bad?

[depakid]

2. Anything that takes uncertainty out of the markets is good

Basically, the faster we find out where the bodies are buried, the quicker people know who to trust and the quicker governments know where to target relief.

[bemildred]

3. It means Lehman debt is considered worth less than ten cents on the dollar.

The parties who sold the "insurance" on the debt will now be asked to cough up the other 90 cents.

The larger ramifications are unknown. This Lehman debt may be security for other "insurance" transactions, for example. So the security on those transactions is now proven to be trash, and that may force other dominoes to fall. It's quite messy.

Or that's my present understanding.

[mcollier]

5. This is where the Bailout money is going

not only that, the money the fed is pouring into banks like crazy to cover these "bets"... We pay the price (debt) for these criminals gambling loses...

Firing squad is in order....

[bemildred]

6. Yeah, this is part of the "plan" to determine how to sequester all those toxic assets.

This morning there was a knock at my door. When I answered the door I found a
well groomed, nicely dressed couple. The man spoke first:

"Hi! I'm John, and this is Mary."

Mary: "Hi! We're here to invite you to come kiss Hank's ass with us."

Me: "Pardon me?! What are you talking about? Who's Hank, and why would I want
to kiss his ass?"

John: "If you kiss Hank's ass, he'll give you a million dollars; and if you
don't, he'll kick the shit out of you."

Me: "What? Is this some sort of bizarre mob shake-down?"

John: "Hank is a billionaire philanthropist. Hank built this town. Hank owns
this town. He can do what ever he wants, and what he wants is to give you a
million dollars, but he can't until you kiss his ass."

Me: "That doesn't make any sense. Why..."

Mary: "Who are you to question Hank's gift? Don't you want a million dollars?
Isn't it worth a little kiss on the ass?"

Me: "Well maybe, if it's legit, but..."

John: "Then come kiss Hank's ass with us."

Me: "Do you kiss Hank's ass often?"

Mary: "Oh, yes, all the time..."

Me: "And has he given you a million dollars?"

John: "Well, no, you don't actually get the money until you leave town."

Me: "So why don't you just leave town now?"

Mary: "You can't leave until Hank tells you to, or you don't get the money,
and he kicks the shit out of you."

Me: "Do you know anyone who kissed Hank's ass, left town, and got the million
dollars?"

John: "My mother kissed Hank's ass for years. She left town last year, and I'm
sure she got the money."

Me: "Haven't you talked to her since then?"

John: "Of course not, Hank doesn't allow it."

Me: "So what makes you think he'll actually give you the money if you've never
talked to anyone who got the money?"

Mary: "Well, he gives you a little bit before you leave. Maybe you'll get a
raise, maybe you'll win a small lotto, maybe you'll just find a twenty dollar
bill on the street."

Me: "What's that got to do with Hank?

John: "Hank has certain 'connections.'"

Me: "I'm sorry, but this sounds like some sort of bizarre con game."

John: "But it's a million dollars, can you really take the chance? And
remember, if you don't kiss Hank's ass he'll kick the shit of you."

Me: "Maybe if I could see Hank, talk to him, get the details straight from
him..."

Mary: "No one sees Hank, no one talks to Hank."

Me: "Then how do you kiss his ass?"

John: "Sometimes we just blow him a kiss, and think of his ass. Other times we
kiss Joe's ass, and he passes it on."

Me: "Who's Joe?"

Mary: "A friend of ours. He's the one who taught us all about kissing Hank's
ass. All we had to do was take him out to dinner a few times."

Me: "And you just took his word for it when he said there was a Hank, that
Hank wanted you to kiss his ass, and that Hank would reward you?"

John: "Oh no! Joe's got a letter Hank sent him years ago explaining the whole
thing. Here's a copy; see for yourself."

John handed me a photocopy of a handwritten memo on From the desk of Joe
letterhead. There were eleven items listed:

1.Kiss Hank's ass and he'll give you a
million dollars when you leave town.
2.Use alcohol in moderation.
3.Kick the shit out of people who aren't like you.
4.Eat right.
5.Hank wrote this list himself.
6.The moon is made of green cheese.
7.Everything Hank says is right.
8.Wash your hands after going to the bathroom.
9.Don't drink.
10.Eat your wieners on buns, no condiments.
11.Kiss Hank's ass or he'll kick the shit out of you.

Me: "This would appear to be written on Joe's letterhead."

Mary: "Hank didn't want Joe to keep his papier."

Me: "I have a hunch that if we checked we'd find this is Joe's handwriting."

John: "Of course, Joe copied it."

Me: "I thought you said no one gets to see Hank?"

Mary: "Not now, but years ago he would talk to some people."

Me: "I thought you said he was a philanthropist. What sort of philanthropist
kicks the shit out of people just because they're different?"

Mary: "It's what Hank wants, and Hank's always right."

Me: "How do you figure that?"

Mary: "Item 7 says, 'Everything Hanks says is right.' That's good enough for
me!"

Me: "Maybe your friend Joe just made the whole thing up."

John: "No way! Item 5 says, 'Hank wrote this list himself.' Besides, item
2 says, 'Use alcohol in moderation,' item 4 says, 'Eat right,' and item 8
says, 'Wash your hands after going to the bathroom.' Everyone knows those
things are right, so the rest must be true, too."

Me: "But 9 says, 'Don't Drink,' which doesn't quite go with item 2, and 6
says, 'The moon is made of green cheese,' which is just plain wrong."

John: "There's no contradiction between 9 and 2, 9 just clarifies 2. As far as
6 goes, you've never been to the moon, so you can't say for sure."

Me: "Scientists have pretty firmly established that the moon is made of
rock...."

Mary: "But they don't know if the rock came from the Earth, or from out of
space, so it could just as easily be green cheese."

Me: "I'm not really an expert, but I think the theory that the moon came from
the Earth has been discounted. Besides, not knowing where the rock came from
doesn't make it cheese."

John: "Aha! You just admitted that scientists make mistakes, but we know Hank
is always right!"

Me: "We do?"

Mary: "Of course we do, Item 5 says so."

Me: "You're saying Hank's always right because the list says so, the list is
right because Hank wrote it, and we know that Hank wrote it because the
list says so. That's circular logic, no different than saying, 'Hank's right
because he says he's right.'"

John: "Now you're getting it! It's so rewarding to see someone come around to
Hank's way of thinking."

Me: "But.... oh, never mind. What's the deal with wieners?"

Mary blushes. John says: "Wieners, in buns, no condiments. It's Hank's way.
Anything else is wrong."

Me: "What if I don't have a bun?"

John: "No bun, no wiener. A wiener without a bun is wrong."

Me: "No relish? No Mustard?"

Mary looks positively stricken. John shouts: "There's no need for such
language! Condiments of any kind are wrong!"

Me: "So a big pile of sauerkraut with some wieners chopped up in it would be
out of the question?"

Mary sticks her fingers in her ears: "I am not listening to this. La la la, la
la, la la la."

John: "That's disgusting. Only some sort of evil deviant would eat that...."


Me: "It's good! I eat it all the time."

Mary faints. John catches her: "Well, if I'd known you where one of those I
wouldn't have wasted my time. When Hank kicks the shit out of you I'll be
there, counting my money and laughing. I'll kiss Hank's ass for you, you
bunless cut-wienered kraut-eater."

With this, John dragged Mary to their waiting car, and sped off.

They did leave me a copy of the letter, however. . .

[lapfog_1]

7. There isn't enough money to cover those policies.

and $.10 on the dollar is insane.

If it's mortgage debt, that means a house that sold for $500,000 in the bubble years is now worth only $50,000. And that's simply not true.

[bemildred]

8. This is not mortgage debt. This is "credit default swaps".

You are probably correct about the "no amount of money" part.

[dipsydoodle]

9. it's nothing to do with the value of the mortgage

It's the number of times it was re-insured. See here for an explanation which was posted by another DUer a week back :
http://www.opednews.com/articles/1/CREDIT-DEFAULT-SWAPS--THE-by-Chuck-Simpson-080924-49.html

[lapfog_1]

10. Yeah, but the insurance was on a

mortgage backed security. The bailout is only dealing with the securities and the underlying mortgages, not the insurance policies. There isn't enough money in the world (unless we hyper inflate) to cover the $50T or more in those CDSes.

[dipsydoodle]

11. I appreciate that.

That is however the main problem.

[burf]

13. But if I understand

the CDS scam, these are not insurance policies. That was part of the scheme, because if they were actual insurance policies, they would have been regulated as such. Those who came up with this scheme knew that and so came up with a term for insurance that was not insurance.

[bemildred]

14. They are bets, it's just like what a bookie does.

You can get odds on anything, but it has nothing to do with securities trading except in their imaginations.

[panAmerican]

4. This is what it means...

Let's say you bought $1's worth of insurance coverage. Something bad happens, you get paid the $1. Part of the calculation that goes into how much you pay for that insurance is how much the company has had to pay out in benefits in the past.

Based on their past payout and the severity of the fall of Lehman, they figured they would have to pay out no more than $0.08 cents. Instead, they have to pay almost the full $1 they were on the hook for. This is why they are frightened.

[phantom power]

12. Coincidentally, it's also why I'm frightened.

:evilgrin:

[bemildred]

15. Lehman derivatives auction described as 'smooth'

SAN FRANCISCO (MarketWatch) -- An auction to work out the value of Lehman Brothers bonds for the huge credit derivatives market went smoothly Friday, according to the International Swaps and Derivatives Association, which helps oversee the market.

The auction set the value of the debt of the bankrupt brokerage firm at 8.625 cents on the dollar, said Markit and Creditex, the administrators of the auction.

Earlier action in the auction suggested Lehman bonds might be worth almost 10 cents on the dollar. The final result means sellers of protection in the credit-default-swap market may have to pay out more than expected to settle the contracts.

Credit-default swaps are a common type of derivative contract that pay out in the event of default. The market has grown quickly, with the notional amount of contracts outstanding surging past $50 trillion in recent years.

http://www.marketwatch.com/news/story/lehman-derivatives-auction-described-smooth/story.aspx?guid=%7BA5ACF291-FC4D-478D-845D-8713E50448B3%7D

[bemildred]

16. Lehman Auction Leaves Cloudy Picture For Banks

Hedge funds and banks that bought insurance against a default in bonds of Lehman Brothers stand to be $365 billion richer.

That's because derivatives traders, using an auction Friday, set the price of Lehman's bonds at 8.625 cents on the dollar. The amount of insurance--in the form of credit default swaps--written to protect bond holders is estimated at $400 billion. Buyers of the insurance will collect the full face value of their holdings from the sellers of the insurance.

Of course that also means the banks, funds and insurance companies that sold it are out $365 billion, which is the difference between the price of Lehman's bonds as set in the auction and the remaining 91.375 cents in face value.

It won't be easy to draw up a quick winners and losers column, however. Buyers of insurance are also sellers and vice versa. The International Swaps and Derivatives Association says all this netting out means the ultimate payout among trading partners may be closer to 2% of the gross outstanding $400 billion, or $8 billion.

http://www.forbes.com/business/2008/10/10/lehman-bonds-banking-biz-wall-cx_lm_1010auction.html