Lehman's CDS settlement has been success

Workers cleared out of the offices of Lehman Brothers in New York last month.(Joshua Lott/Reuters)
Photo courtesy of The New York Times
From Marketwatch:

The Depository Trust & Clearing Corp. will issue a statement when the settlement is completed, according to spokeswoman Melanie Best. She declined to comment on timing.
Payments under these derivatives contracts have to be made by the close of business Tuesday.

The International Swaps and Derivatives Association, the group that represents swaps dealers, issued a statement just before 6 p.m. Eastern noting the "success" of the Lehman settlement.

"Today's settlement demonstrates that the industry infrastructure for [credit-default swaps] clearly works," said Robert Pickel, chief executive of the ISDA.

The exchange between the buyers and sellers of credit-default swaps, a type of derivative contract that pays out when a company reneges on its debt, spooked markets Tuesday. Some investors worriedsellers would be unable to come up with the cash to pay their counterparties, and these no-shows would usher in a new round of bank or fund failures.
This type of domino effect turned what started as a U.S. housing-market collapse into a global credit crisis.

"Settlement of Lehman's CDS is what has the market on the nervous side," said Peter Cardillo, chief market economist at Avalon Partners, said earlier Tuesday about the credit-default swaps. The major U.S. stock indexes briefly scaled back declines late in the session after reports that counterparties had closed the swaps settlement without a hitch.

Meanwhile John Carney of ClusterStock wrote, "But don't get too excited about this yet. Even if fears of losses were exaggerated we won't know the true cost for several months. Most probably won't be public until companies post fourth quarter earnings."

While there is now only $40 billion or so of United States leveraged buyout-related loans stuck on bank balance sheets — a sixth of last year’s peak — another overhang threatens. S.& P. estimates that hedge funds and structured investment vehicles hold $50 billion in loans they might be forced to sell.

That dam may already be cracking. The volume of loan portfolios sold in the first three weeks of October has already beaten the previous monthly record. Treasury Secretary Henry M. Paulson Jr. and the Federal Reserve chairman, Ben S. Bernanke, almost certainly didn’t anticipate the global panic that swept over the financial system after Lehman went bust, causing other banks to tumble like dominoes. And clearly in the ensuing conflagration shareholders and speculators have been burned. Taxpayers across the world have also had to pledge more than $2 trillion to rescue the industry.

Related Posts :

1. $365 bln of Lehman CDS is going to be settled tomorrow
2. 10/21/2008 Market Recap - Lehman CDS Settlements & Dispointed Earnings

Sources :

1. Marketwatch: Lehman default swaps still pending, DTCC says, October 21, 2008 11:42 pm EDT
2. ClusterStock: Lehman Swap Settlement Goes Better Than Expected, October 21, 08 4:35 pm
3. The New York Times: Was Lehman Loss All That Bad?, October 21

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