Markets Hold Breath as $360 Billion Worth of Lehman Swaps Unwind
October 20th, 2008Can it all just be added to the tab? We’ll find out over the next 48 hours.
Via: Telegraph:
The $54trillion credit derivatives market faces a delicate test as $360bn worth of contracts on now-defaulted derivatives on Lehman Brothers are due to be settled on Tuesday.
Due to the opacity of the market, which is one of the most complex, least regulated and least understood in the global financial system, it is still not clear how many contracts have to be settled or which institutions will take the ultimate hits once the billions of dollars worth of contracts have been unravelled. The collapse of Lehman Brothers, is expected to trigger credit default swap (CDS) protection pay-outs of about $400bn but because the contracts were sold many times through different counterparties it is not yet known who will be liable.
One commentator said: “This will be the greatest illustration of the follies of Wall Street and how unnecessarily complicated the wild off-track betting became in the past few years.”
Five years ago Warren Buffett, the iconic American investor, warned that the chaotic profusion of derivatives used by companies and hedge funds to fund financial growth were “financial weapons of mass destruction.’’
Bankers in the City and on Wall Street are bracing for yet another round of turbulence as the contracts are unwound.
The Bank of England and the Federal Reserve in America have said they will keep their special liquidity windows open late on Tuesday night to allow the contracts to settle.
“We’re in unchartered waters here and it may all prove an anti-climax,” said a senior City banker on Friday, “but everyone will be watching the situation and wondering what’s going to happen.”
