What you’re not reading in the financial press
Sure, you’ve read plenty about the stock market completely disintegrating, but there’s much worse going on that you’re not reading about.
You all remember Lehman Brothers, the once venerable investment bank that declared bankruptcy several weeks ago. You may also have heard about credit default swaps - a form of insurance that investors buy to protect them against exactly what happened to Lehman.
Now, Lehman must liquidate its assets in order to pay back its creditors. Should they sell them for any less than 100 cents on the dollar, the people who underwrote the credit default swaps (debt insurance), mostly other banks, are on the hook for the difference, in order to make investors holding Lehman’s bonds whole.
The auction for Lehman’s bonds closed today - at 8.625 cents on the dollar. Bloomberg estimates that means the banks that sold the credit default swaps on Lehman’s debt are on the hook for over $270 billion dollars. This huge amount is likely going to force asset sales as banks try to come up with that kind of money, potentially depressing the market further.
There is so much going on behind the scenes in the commercial paper and derivatives market that’s not being covered by the mainstream press because it’s too complicated for most people to follow. Watch this space as I try to distill current events down into layman’s terms for everyone to digest over the next several weeks.
