Rhino: Breaking: Not worth a dime!!!Submitted by rhino on Fri, 10/10/2008 - 12:34
That is what the Lehman debt is pricing at on the market. Less than $.10 on the dollar. Right now it is just under a dime on the dollar, but this is just on $5 billion of the $500 billion debt. It is projected to go lower than this. Of course it can only go to zero.
What does this mean?
Well, most think that those pesky CDS (credit default swaps) have a market built in price of about $.50 on the dollar.
A CDS is basically insurance on debt.
These insurance instruments were purchased as part of the agreement on the debt.
In other words, if Lehman defaults, and it did, then the companies that issued the CDS on Lehman’s debt are on the hook for the difference.
The problem is that the CDS was probably issued at premiums based on a 95% payback rate or better. Therefore the premiums will not be able cover this loss.
Get ready for the CDS issuers to go belly up.
Who are the issuers?
Insurance companies and financial institutions.
This means there are more write-downs and losses to come.
More pain to come.
Now on Bloomberg:
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 of the auction to determine the size of the settlement on Lehman credit-default swaps set an initial 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.
Based on the results, sellers of protection may need to make cash payments of about $270 billion, BNP Paribas SA strategist Andrea Cicione in London said. The potential payout is higher than investors anticipated, based on trading in Lehman debt, and caused the bonds to fall. The bonds fell to about 9.5 cents on the dollar today. They traded at an average 13 cents yesterday, indicating a payout of 87 cents was expected. ...
UDATE: Initial price at 8.62 cents. The auction will be the big do or die. If skeptism continues, the gov. will be buying most of this at well under a dime on the dollar.