Lehman CDS auction fears allayed

The Independent – The financial fall-out in the vast, opaque credit default swaps market caused by the collapse of Lehman Brothers could be smaller than originally feared, analysts say.

Optimism was rising yesterday that the unwinding of insurance contracts on Lehman debt might involve the transfer of barely $6bn, and that the settlement next week can be completed without a major player failing to pay.

The concern had been that banks and hedge funds who promised to compensate trading partners for losses on Lehman bonds would not have the money to do so, triggering a chain reaction of losses through the financial system.

Although Lehman bonds were valued in a closely-watched auction last Friday at just 8.625 cents on the dollar, and sellers of credit default swaps will have to pay out a higher-than-expected 91.375 cents on the dollar, the great majority of players are both buyers and sellers of credit default swaps – meaning they can net off their exposure.

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