Lehman Settles CDSs for 8.625 Cents on the Dollar

From the Journal...

"The recovery rate on the bankrupt firm's senior debt was fixed at 8.625 cents on the dollar, just below the 9.75 cents published in the first estimate Friday. That means the sellers of insurance on these defaulted bonds are on the hook for the remaining 91.375 cents. That's well above the approximate 88 cents envisaged earlier this week, when increased demand for paper to present in return for compensation inflated the market price."

This isn't making big waves in the financial media yet, despite the fact that everyone in-the-know was well cued up for this. That's an unexpected good sign.

Dwight Cass on Lehman CDSs Today

We should know how this pans out by 2pm EST today...

"Lehman, which filed for bankruptcy in mid-September, has about $113bn of bonds outstanding, according to Reuters Knowledge. It’s impossible to know how much protection has been written on that debt, since credit derivatives are privately negotiated and not all protection buyers hold the underlying debt. It’s likely that the amount of CDS linked to Lehman is at least several times the size of its borrowings.

The Lehman CDS auction process is set for Friday [today]. Large amounts of cash are likely to change hands as a result. But since there’s a winner for every loser in this market, the net effect on the financial system should be minimal. Except that no-one knows if all the losers will be able to pay – and that’s what has Wall Street worried."

Full piece here.

Lehman and the CDSs

Busy here, so I'm quickly going to quote (rip off) FT, Rueters, and Barry Ritholtz...

Banks are hoarding cash in expectation of pay-outs on up to $400bn of defaulted credit derivatives linked to Lehman Brothers and other institutions, according to analysts and -dealers.

This added pressure on the frozen financial system comes as authorities prepare to meet participants in the so-far unregulated $54,000bn credit derivatives market to speed up plans for the creation of a central clearing house.

The Federal Reserve will meet dealers, investors and exchange executives in New York today. Although big dealers had committed to setting up a central counterparty by the end of the year, urgency has increased in light of the collapse of banks around the world and as company bankruptcies loom.

"The New York Fed will hold a meeting [today] with a small number of banks and buyside firms to discuss the progress being made toward the creation of a central counterparty for credit default swaps," said a Fed official, adding that this would "help reduce systemic risk associated with counterparty credit exposure and improve how the failure of a major participant would be addressed".

So what does that mean? Tomorrow...

Twenty-two dealers will participate in the auctions, which will determine how much protection sellers will recover after paying out the insurance. The timeline for the auctions follows, according to JPMorgan.

9:45 a.m.-10 a.m. Auction participants will submit bids and offers for the debt backing the credit default swaps, which will be used to determine the initial recovery rate of the swaps.

10:30 a.m. Auction administrators Creditex and Markit will publish the initial recovery price and the open interest for the contracts will be published. The open interest reflects the amount of bids and offers that have been made, and will show if there are more buyers than sellers, or vice versa.

12:45 p.m. -1 p.m. Participating dealers will submit limit orders for the debt on behalf of themselves and their clients to fill the open interest

2 p.m. The final price of the auction will be published.

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