As reported earlier, today is the Lehman credit default swap settlement. It's going to be big. In fact, I think this was the biggest reason for the market's collapse today. This was published by Morningstar yesterday.
It's interesting the the Treasury bailed Bear Sterns bondholders but not the bigger Lehman Bros. Bear's bailout undoubtedly incentivized CDS protectors into the Lehman market. If Bear's bondholders were bailed, certainly Lehman's would be. No. The Treasury's position (change of) is curious. Perhaps they'd now prefer to flush the market players to the surface and use TARP or other FedRes emergency measures for selected counter parties. It certainly puts the Treasury in a very powerful position. Who will get protection and not? This, unfortunately, incentivizes political corruption as Milton Friedman might suggest. Today's settlement is likely to create many insolvencies, hence the domino effect of the swap market and the reason they are the WMD of finance.
Details: 9:45 a.m.-10 a.m. Auction participants will submit bids and offers for the debt backing the credit default swaps, which will be used to determine the initial recovery rate of the swaps.
10:30 a.m. Auction administrators Creditex and Markit will publish the initial recovery price and the open interest for the contracts will be published. The open interest reflects the amount of bids and offers that have been made, and will show if there are more buyers than sellers, or vice versa.
12:45 p.m. -1 p.m. Participating dealers will submit limit orders for the debt on behalf of themselves and their clients to fill the open interest
2 p.m. The final price of the auction will be published. (Reporting by Karen Brettell; Editing by Chizu Nomiyama)
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