trm

Lehman CDS: It Won't Be Over Today

This is somewhat shocking to me. I always believed that unless the counterparty went bankrupt, they had to pay out on the debt if the issuer went bankrupt. The idea that you held Lehman debt, protected by a CDS, and now you only get 9-10 cents (as of this morning's decision) of payout is crazy. Given that you probably paid 5-7 cents near the end ($500-700,000 annual payment for protecting $10 million in Lehman debt), the CDS turned out to be almost worthless. I am surprised the CDS market is not shrinking substantially given this lack of true underlying value.