First CDS Bullet Dodged, but Good Luck with Lehman on Friday

The CDS market Monday dodged the first of three big bullets headed its way when, undoubtedly aided by the tailwind of now explicit government guarantees, the auction of obligations related to the debt of Phoney (FNM) and Fraudy (FRE) produced recoveries from 91.5-99 percent for protection sellers.

But, as noted on these pixels Monday, the real fun starts Friday, when the Lehman (LEHMQ.PK) deals get unwound. According to The Financial Times:

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. 

The International Swaps and Derivatives Association, in association with the Federal Reserve Bank of New York, Monday released a training video describing the process to be used on Friday and again on Oct. 23, when the WaMu (WM) hits the fan.

Fed to hold CDS clearance talks
by Aline van Duyn and Hal Weitzman
The Financial Times Oct. 7 2008

Fannie, Freddie CDS recovers 91.5-99.9 pct in auction

Reuters Oct. 6 2008

Fannie Mae and Freddie Mac CDS Auctions

CreditFixings Oct. 6 2008

2008 Lehman CDS Protocol

International Swaps and Derivatives Association

Comments

[helplessobs...:]

Well, at least this is better than trying to track down the buyers and or sellers of these CDS obligations. The video is appropriate as many organizations will die when they cannot deliver the cash required for settlement and try simply to fade into the woodwork.

2008 Oct 08 11:12 AM