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The Lehman Unwind...



October 10, 2008 – Comments (6)

Wow, I was just looking at Yves blog on Lehman.  The one kind of derivative, the credit default swaps (CDS), are horrendous.  They were expected to pay out in the 80 to 85% range, which means you pay 4 to 5 times what the mortgage is currently trading for.

It started at 9.75c on the dollar meaning the swap (Lehman) has to pay 90.25, or about 10 times what the mortgage is currently trading for.

This is going to be interesting to see how this finishes playing out.  This is billions of payout expected from a bankrupt company....

6 Comments – Post Your Own

#1) On October 10, 2008 at 3:12 PM, BradAllenton (31.51) wrote:

I am also concerned about this news. When it crossed this morning I was like "ouch"

It looks like the market is pricing in a second coming of the stone age.

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#2) On October 10, 2008 at 3:19 PM, floridabuilder2 (98.23) wrote:

are you tempted yet dwot?  buying in that is!!!

congrats you are a greater fool than I... although at some point your going to have to green thumb stocks ; - ) to maintain that ranking

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#3) On October 10, 2008 at 4:27 PM, leohaas (29.98) wrote:

It is actually the sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. who would need to pay 90.25 cents on the dollar, not LEH itself. These sellers are banks, hedge funds, and AIG.

The whole thing is so scary, because these sellers now need to come up with the money. It is one of the reasons why banks have been hoarding cash. Hedge funds are just gonna sell whatever they have on their books: stocks, bonds, mortgage-backed securities (if they can), commodities, you name it. That will lead to the next leg down in all markets. And as far as AIG is concerned, we all know who is on the hook for their part of the action...

I think I'll just hang on a little longer to my SPY puts and SKF calls, even though they are in the money!

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#4) On October 10, 2008 at 6:27 PM, dwot (29.16) wrote:

Leohaas, your comment prompted me to re-read this...  So, who's in trouble next because of this?  Well, besides AIG?

Yuck...  The market ought not had its recovery yet...

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#5) On October 10, 2008 at 8:01 PM, leohaas (29.98) wrote:


AIG is in trouble, but the US taxpayer has got them covered.

The article you refer to mentions 350 banks. I don't know the details, but it means that they are on the hook for some of the $270B or so.

And finally, it is the hedge funds. That is what is really scary. Nobody knows what these guys own or owe. But I can bet you that they do not have the cash laying around. So, they must liquidate their assets. They'll sell whatever they can sell. This affect all asset classes: stocks, real estate, commodities, and so on.

No doubt they have started doing that already. Their selling has played an important role in the enormous drops we have seen over the past week. I am not sure how far they are done, but count on the sellling to continue into next week. Hold on to your hat for another leg down, maybe after a dead cat bounce. That is why I believe it is too early to jump back in.

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#6) On October 11, 2008 at 12:18 AM, dwot (29.16) wrote:

I am with you that it is too early to jump back in leohaas, at least for my tastes.

Covering $270 billion in claims at firesale prices isn't going to be good...  And then the hedge funds are also dealing with margin requirements increasing.  And then they are also dealing with redemptions.

And I think when earning reports come in they are going to be disappointing and the economy such that improvements are difficult to achieve.

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