Coming up on a credit default deadline

A trader works on the floor of the New York Stock Exchange as the Federal Open Market Committee announced it will hold the federal funds rate at 2 percent, despite the recent turmoil among investment banks on Wall Street.

TEXT OF STORY

Renita Jablonski: Billions of dollars could change hands today as a result of the Lehman Brothers bankruptcy a month ago. It's the deadline for sellers of so-called credit default swaps to settle up. Analysts say some of those sellers could have a hard time coming up with the cash. Marketplace's Amy Scott explains.


Amy Scott: Let's say that back when Lehman Brothers was still Lehman Brothers, I bought some of its bonds. I may also have bought some insurance on those bonds, so that if anything went wrong with Lehman, I'd get my money back.

That insurance is called a credit default swap. And as we know, something did go wrong. Today is the day that whoever sold insurance on Lehman Brothers has to pay up. Estimates of the total price tag range from $6 billion to hundreds of billions.

Puneet Sharma follows the credit markets at Barclays Capital in London. He says given the losses many hedge funds and banks have already suffered, some may have trouble raising the money.

Puneet Sharma: We've seen unprecedented moves in the market across asset classes, and I think this could just be the straw which breaks the camel's back.

Trouble is, it's hard to know just who the camels might be. The credit default swap market is largely unregulated. So no one really knows who owes what to whom and how much.

In New York, I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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