Lehman Swaps Settling for Pennies on Dollar

UPDATED AT 3:02 p.m.

The Lehman auction has concluded and set a price of 8.625 cents on the dollar for the debt. That means sellers of credit-default protection will have to pay holders 91.375 cents on the dollar, setting up the biggest-ever payout in the $55 trillion market, Bloomberg writes.

The auction currently underway to settle credit default swaps backed by bankrupt Lehman Brothers looks like it's going to end with massive losses for the banks and hedge funds that sold protection on Lehman's debt.

Credit default swaps, or CDSs, are -- along with mortgage-backed securities -- at the heart of the current financial crisis.

The CDS is an insurance policy against a default. Problem is, the CDS market was totally unregulated and buyers could swap them around with no one ending up holding responsibility if the debts went south.

The auction underway now will determine how much people who bought those insurance policies can get back after Lehman declared bankruptcy.

Right now, it looks like the CDSs are worth 9.75 cents on the dollar.

Imagine your house burns down and is worth 10 cents on the dollar. Your insurance company still has to pay the 90 percent difference. The question is whether it can. It's like that.

Why would anyone want to buy these devalued contracts? Because lots of people think they will be worth closer to their full value down the road when the markets recover. Like many things on Wall Street, it's a bet.

-- Frank Ahrens

October 10, 2008; 11:31 AM ET  | Category:  business
Previous: Motley Fool: Good Time To Start a 401(k) | Next: CNBC's Burnett Forecasts Sunshine


Please email us to report offensive comments.

So am I correct in deducing that Paulson was willing to pay $700 billion for assets that have a current market value of $70 billion in the hope (prayer?) that the assets would be worth $700 billion at some point in the future?

Posted by: John | October 10, 2008 11:57 AM

Can ordinary people by the credit default swaps?

Posted by: Larry | October 10, 2008 12:01 PM

GM is asking for a bailout package.

Posted by: Harry | October 10, 2008 12:02 PM

The new money guys are the same as the old money guys. The girls still manage the money better. Marry an heiress and you are all set. It looks like the next wave of panic is all set for the afternoon. Business could alway be better and it could always be worse. Quality pays for itself and we have as much quality as we need. We don't always get what we want. I have work to do and so do you. They were talking about getting rid of the penny and after that the paper. That really turned out well.

Posted by: IV | October 10, 2008 12:13 PM

The CDS market is 12 times the size of the actual corporate bond market. Investors have been taking out CDS's on bond's they do not even own. THIS IS THE FIRST PLACE THAT NEEDS REGULATION IF IT IS ALLOWED TO CONTINUE AT ALL.

Posted by: Matthew | October 10, 2008 12:20 PM

I think that is inaccurate. The 9.75 cent figure you quote is what the Lehman bonds are WORTH. What that means is that whoever insured those bonds HAS TO PAY 90.25 cents on the dollar in claims. So, to get back to your analogy... it would be more accurate to say that your house after it has burned is worth 9 cents on the dollar. Your insurer still is stuck with having to pay the 91 cent difference. The problem is whether the insurer can pay.

Posted by: Vonnegutian | October 10, 2008 12:21 PM

And here's the funny. Bank A lends money to hedge fund B. So to protect its loan A turns around and buy CDS against the chance of B defaulting ...

from B.

Posted by: Anonymous | October 10, 2008 12:22 PM

It would be a public service for the media to publish the names of the banks, hedge funds, etc. who actually provided insurance on the Lehman, etc. debt so that the public could evaluate who had a real problem or not. We talk about transparency but when the media has a chance to really name the insurer, guarantor or culprit, they protect the name. It is time for all the culprits to be named.

Posted by: Charles Hopfl | October 10, 2008 12:23 PM

I'm moving here and don't worry Post, I just finished packing my old Post paper into the box with the rest of the permanent plan papers and other materials. It goes way back to 1793, so it looks good here. I hope it looks better there. Given enough time, I'm sure it will. It couldn't look much worse than it does. In five years we'll be looking back and laughing about this. If we're not here, somebody else will be. They can take the permanent plan from there.

Posted by: IV | October 10, 2008 12:24 PM


It is a planned takeover of American's assets. For financial gain and more, to get us on our knees - in fear - begging for a New (World) Order designed by the Power Elite.

Who do you think is creating the New World Order (NWO)?

It is being created right before your eyes. By Specific Intention. However the world doesn’t realize that it is intentional. That’s the plan, and it is being executed on schedule.

Those who laugh at America’s apparent demise do not realize that the joke is on the entire world population, with one exception, the ‘Power Elite’. As you say, “Regardless of your opinion on the matter.”

You say, “America must reform itself”, but do not see that America is the initial instrument to reform the entire world system. This is why, whatever country you are in, as you said, you are “quite nervous.” It is not accidental that what happens in NYC, D.C., and Chicago (Commodities Exchange) affects everyone in the entire world.

“Evaluate the parties inside it to check whether or not they will damage the” _entire_world “or not.” They will damage the entire world population, with one exception, the ‘Power Elite’. That’s by specific intention. One fundamental reason is that, as scientists advise, the exploding population growth is a great risk that must be dealt with. Who is the dealer? Go figure. It won’t take two seconds to figure out whose dealing the cards and whether or not the deck has been pre-arranged.

Many people are “quite nervous”, for the specific reason that they have by specific intention, already been made, economic slaves. Our economic masters are the ‘Power Elite’. That’s why they can take $850,000,000,000+ USD of the slaves money at the raise of their hands, and a stroke of their pen, and give it to themselves.

Best find a higher master. Best do what the American dollar says to do, “In God We Trust”. Best pray that the true God reveals Himself to you and your family, as I also do. There are more powerful men thinking and executing their intentions despite our thoughts, may we also use our hearts as well as our heads. Keep your head up and your heart warm!

I am praising a New World Order, the NWO that is not created by selfish, evil men, but the NWO that is created by the generous Creator of man! This is written about directly at the end of the Master Designer’s book. Please take a moment to look at the last two chapters of the Bible and you will immediately see for yourself the NWO that is worthy of praise. You’ll be glad you did!

Arm yourself with the following information - when the appointed time comes for these events to happen, you will know what is going on:


Posted by: Anonymous | October 10, 2008 12:25 PM

Can ordinary people by the credit default swaps?

Posted by: Larry | October 10, 2008 12:01 PM

If you have to ask, then the answer is NO! You don't have the knowledge and experience, nor are you financially qualified.

Go to Vegas instead. At least you will have a little fun and a few free drinks while you are losing your money.

Besides, Las Vegas prostitutes are better looking than Wall Street prostitutes.

Posted by: KEVIN SCHMIDT | October 10, 2008 12:27 PM

>> If you have to ask, then the answer is NO! You don't have the knowledge and experience, nor are you financially qualified.

Yeah? And all these big boys on WS do? Which one LEH or AIG?


Posted by: Anonymous | October 10, 2008 12:32 PM

my biggest complaint, those who bought the insurance were paying huge sums to protect their investments, and now they may not be able to recoup that expense. Another instance where high-risk behavior is paying off at the expense of responsible investors

Posted by: Matthew | October 10, 2008 12:33 PM

Both Bearn Stearns and AIG were brought down by Credit Default Swaps.

They are, fundamentally, insurance policies but were called Credit Default Swaps so that, unlike insurance, they could avoid all the regulatory bodies.

We have John McCain's bosom buddy and "economic guru", Phil Gramm, to thank for pushing through Congress the legislation that created this $60 trillion totally unregulated shadow economy.(Alan Greenspan was another salesman of this Ponzi scheme.)

Once the legislation was in place, Gramm took his payoff: a vice-chairmanship at the Swiss bank, UBS. (His wife, Wendy, had pulled a similar stunt when, as chairperson of the Commodity Futures Trading Commission, she pushed through a rule excluding Enron's energy futures contracts from government oversight -- and then joined the board of Enron.)

The only upside: UBS losses are in the tens of billions and climbing.

The downside: Gramm's greed and deregulatory irresponsibility has brought the world to edge of a financial precipice.

David Corn has written a must-read article on the Gramms, McCain and where much of the fault for the current financial meltdown can be laid:


Posted by: pali2500 | October 10, 2008 12:37 PM

So what's the deal on MS? Is Paulson gonna let it die too, like LEH? Hasn't he learned his lesson?

Or is he setting up shorties?

Posted by: Anonymous | October 10, 2008 12:44 PM

America! We must force Christopher Cox and the SEC to act to protect our interests as American investors. I have talked to many staffers at the offices of many representatives and senators and unbelievably, no one has a clue! Please send a copy of this message to your representative and senators. We must act to force our government to consider and protect the interests of the average, taxpaying citizen, rather than, just, their wealthy friends with the big campaign donations!

Good Morning Everyone,

I’ll begin by asking a question that I have asked many representatives and senators several times before and have yet to receive an answer. What was the logic behind Christopher Cox’s removal of the Uptick Rule on Short Sales, when he took over as Chairman of the SEC? Since I first asked that question several months ago, the SEC has started enforcing the existing rules on naked short sales for … 19 specific stocks and later for all stocks or maybe not and then placed a temporary moratorium on short selling on 799 financial stocks and, now, has let the moratorium expire!

Somewhere in the middle of all of the above, I, finally, had to ask the representatives and senators the following question. “Is this administration really intent on letting their friends plunder America’s economy?”

I, still, have not received an answer to either question, and considering the last two weeks and the tremendous loss of wealth in the whole market, I, really, think that America deserves an answer to these two questions.

When Australia placed a temporary moratorium on short selling, they chose to cover all of their securities due to the lack of confidence in the whole market and the fear that the hedge funds would start feeding on the unprotected stocks.

“Market players had been concerned that an inadequate regime would allow overseas hedge funds, who were causing mayhem in some stocks before the clampdown, to resume selective and damaging bear raids.”

In addition, during these volatile times, the Australian Securities and Exchange Commission is requiring their brokers to report their stock short positions once a day, while Chris Cox is requiring our brokers to report their stock short positions once every fourteen days! In reality, to properly protect the investor, a markets’ stock short position should be reported in real time just as a stock’s traded volume is.

Based on the last several days of trading in America’s markets, I think the ASEC acted responsibly. So, while Christopher Cox fiddles, how many trillions of dollars of Americans’ hard earned savings have been drained from America’s stock markets?

During a recent hearing in the House Oversight Committee, there was a discussion on the death match between the administration empowered, greedy hedge funds and the often defenseless companies. The hedge funds profits are maximized, when the targeted company collapses and enters bankruptcy, and the innocent investors lose everything, not because of mismanagement but because of greed!

Placing a bet that a company’s stock price is inflated and will decrease over time may be acceptable, but driving a company into bankruptcy for the greed of an uninvolved party is unconscionable.

And what is next? The following is from an SEC write-up on a short selling roundtable.

“For example, short selling can be used in a downward manipulation whereby a manipulator sells the shares of a company short and then spreads lies about a company's negative prospects. This harms issuers and investors as well as the integrity of the market. This kind of manipulative activity is particularly problematic in the midst of a loss in market confidence. For example, in the context of a credit crisis where financial institutions face liquidity challenges, but are otherwise solvent, a decrease in their share price induced by short selling may lead to further credit tightening for these entities, possibly resulting in loss of confidence in these institutions.”

We are seeing record lows on many of our major companies’ stock prices! So, in the next few days, how many solvent, nonfinancial, American companies will succumb to the greed of the hedge funds, the liquidity challenges, and Christopher Cox’s complete failure to act responsibly as chairman of the Security and Exchange Commission?

The Congress and the President can act to pass an $850,000,000,000.00 bailout, yet no one can get the Chairman of the SEC to do his job and protect America’s stock markets?

I, truly, think it is time for some serious criminal investigations, while there is something left to save. I don’t mean to beat a dead horse, but where in the hell is Christopher Cox anyway?

In the interim, Christopher Cox and the SEC must reinstate the temporary moratorium on short selling on all stocks until the SEC can institute the rules necessary to protect the investor against the unbridled short selling by the greedy hedge funds! Some of those rules are:

1. Reinstatement of the Uptick Rule
2. Require real-time reporting of a markets’ stock short position just as a stock’s traded volume is currently reported.
3. Modify the T-3 rule to make the broker responsible for confirming that the seller is in possession of the underlying stock.
4. Modify the rules for enforcing the Failure To Deliver (FTD) violations and require severe penalties for such violations.

Joe Barrett

Posted by: Sam Bear | October 10, 2008 12:56 PM

I assume that the individuals or institutions who purchased these CDSs either were very wealthy--had so much money that they'd be private banking clients whose brokers recommended them purchasing CDSs--or were large institutional investors willing to risk large sums of money. Either way they deserve what they get.


Posted by: el_barto | October 10, 2008 1:11 PM

"So what's the deal on MS? Is Paulson gonna let it die too, like LEH? Hasn't he learned his lesson? Or is he setting up shorties? Posted by: Anonymous"

Speaking of Morgan Stanley, I can't believe that they're running ads trying to get people to invest with them.

Morgan Stanley, world wise?

more like reckless.

Posted by: el_barto | October 10, 2008 1:16 PM

GM says bankruptcy is an option !!!!!!!
Friday, October 10, 2008; 9:51 AM
General Motors Corp (GM.N) said it was considering bankruptcy protection as market turmoil continues and Barclays Capital said on Friday that the company's cash needs were increasing.
Barclays cut its share-price target on GM to $4 on Friday, renewing potential pressure on the largest U.S. automaker.
GM shares fell as much as 16 percent to $4 in early New York Stock Exchange trade, their lowest price since 1949, before recovering. They had plunged 31 percent on Thursday following news of a potential credit ratings downgrade and a

forecaster's report that global auto markets could be in danger of an "outright collapse" in 2009.

The company, which posted a second-quarter net loss of $15.5 billion, announced plans in July to improve its liquidity by about $15 billion by the end of 2009, about two-thirds through cost cuts and the rest through asset sales and new borrowing.

"Clearly we face unprecedented challenges related to uncertainty in the financial markets globally and weakening economic fundamentals in many key markets," GM said in a statement on Friday.
bankruptcy protection is an option GM is considering," it said. "Bankruptcy would be in the interests of our employees, stockholders, suppliers or customers."
On Thursday, Standard & Poor's said it might cut the credit ratings of GM

Posted by: DAVID,VETERAN | October 10, 2008 1:26 PM

Most purchasers of the so-called "insurance" provided by credit default swaps do not own the underlying asset. While some of the swaps are used by owners of assets to shift risk, there are many other uses of swaps, including just plain bets, made between counterparties where neither one owns the underlying asset. The default of a bond can trigger swaps payments to the multiple contract owners far in excess of the face value of the bond.

Posted by: Liz | October 10, 2008 1:28 PM

Here's the story from a source that actually tells it correctly, sorry Frank but you described it the opposite way to how it works:

Oct. 10 (Bloomberg) -- Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. would be forced to pay holders 90.25 cents on the dollar under initial results of an auction, setting up the biggest-ever payout in the $55 trillion market.

Preliminary results from an auction to determine the size of the settlement on Lehman credit-default swaps set a value of 9.75 cents on the dollar for the debt, according to Creditfixings.com, a Web site run by auction administrators Creditex Group Inc. and Markit Group Ltd. A final price is scheduled to be announced at 2 p.m. New York time

Posted by: steve | October 10, 2008 1:57 PM

Hi, Vonnegutian:

Thanks for the suggestion -- I was trying to simplify and oversimplified.

Posted by: Frank Ahrens | October 10, 2008 3:08 PM

the credit default swaps (and their lack of regulation) are an important component of this financial crisis. everyone had a hand in this problem, and the efforts by right wingers like limbaugh to lay the blame entirely on democrats and minorities who dared to seek a loan is (not so) veiled racism. it is ugly.

Posted by: gdb | October 10, 2008 3:08 PM

The comments to this entry are closed.

RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company