The sky didn’t fall on Lehman swaps
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Kai Ryssdal: All those reports of credit default swaps being the most recent sign of the financial apocalypse? Um, never mind. There were predictions of hundreds of billions in losses due to Lehman Brothers swaps when that company went bankrupt. But it turns out, probably not as many billions as everybody predicted. Marketplace’s Amy Scott has the update.
In the end just over $5 billion changed hands to settle Lehman Brothers credit default swaps.
That’s according to the Depository Trust and Clearing Corporation.
The DTCC’s Frank De Maria says his company tracks the vast majority of those transactions.
Frank De Maria:
I would think that should give market participants some comfort that there is a order and discipline to the credit default swap market, as opposed to some of the things that have been portrayed recently in the press.
He’s talking about the fear that settling the Lehman swaps could have cost banks, hedge funds and insurance companies in the hundreds of billions of dollars.
The swaps are like insurance that pays out when a company defaults on its debt.
So how did we get it so wrong?
Industry reps say many institutions both bought and sold insurance on Lehman bonds essentially cancelling out their positions. But skeptics question whether the DTCC has the full story. They say the market is unregulated, so buyers and sellers of swaps don’t have to report their trades.
Chris Whalen is managing director of Institutional Risk Analytics. He says what started as an insurance contract turned into a bet on a company’s solvency.
This activity has no economic basis. It’s just people gambling. So whether or not it worked out okay or not, to me is really not the point. The real point is whether or not we should allow our banks to be participating in this market.
Whalen believes some dealers may be hiding their exposure to credit default swap losses and the real fallout may be yet to come.
In New York, I’m Amy Scott for Marketplace.
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