Credit-Default Risk (CDS) Soars After Lehman Brothers Files for Bankruptcy

September 15, 2008 by · Leave a Comment
Filed under: Industry News 

Much uncertainty on Wall Street today. According to Bloomberg, Lehman was a top 10 dealer in CDS or credit-default swaps. First fallout with a major market maker going under is the amount counter-parties are demanding for debt insurance has gone up 50% overnight in many cases.

Bill Gross of Pimco made this comment ““The immediate problem is the derivative default swaps market, in which a plethora of institutional accounts and dealer accounts are at risk,” “It induces a tremendous amount of volatility and uncertainty.”” In this article they stated if a company insured $2 trillion in debt and went under it would induce 36-47 billion dollars in losses. This is not good and we might finally be over the edge with no way back.

CDS Article:

Bond-default risk soared worldwide as the collapse of Lehman Brothers Holdings Inc. sparked concern than the $62 trillion credit-derivatives market will unravel.

Benchmark gauges of corporate credit risk rose by a record in Europe, and traded near an all-time high in North America, driven by a rise in Goldman Sachs Group Inc., Morgan Stanley and American International Group. U.S. two-year Treasuries climbed, pushing yields below 2 percent for the first time since April, as investors sought the relative safety of government debt.

Lehman, the fourth-largest securities firm until last week, has been one of the 10 largest counterparties in the market for credit-default swaps, according to a 2007 report by Fitch Ratings. The market, which is unregulated and has no central exchange where prices are disclosed, has been the fastest- growing type of so-called over-the-counter derivative, according to the Bank for International Settlements.

“The immediate problem is the derivative default swaps market, in which a plethora of institutional accounts and dealer accounts are at risk,” Bill Gross, manager of the world’s largest bond fund at Pacific Investment Management Co. in Newport Beach, California, said in an interview with Bloomberg Radio yesterday. “It induces a tremendous amount of volatility and uncertainty.”

The Markit CDX North America Investment Grade Index, linked to the bonds of 125 companies in the U.S. and Canada, rose 37.5 basis points to 189.5 as of 9:45 a.m., according to broker Phoenix Partners Group. The Markit iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings jumped 68 basis points to 614, according to JPMorgan Chase & Co. prices.

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