Lehman Auction Leaves Cloudy Picture For Banks

Hedge funds and banks that bought insurance against a default in bonds of Lehman Brothers stand to be $365 billion richer. That's because derivatives traders, using an auction Friday, set the price of Lehman's bonds at 8.625 cents on the dollar. The amount of insurance--in the form of credit default swaps--written to protect bond holders is estimated at $400 billion. Buyers of the insurance will collect the full face value of their holdings from the sellers of the insurance. Of course that also means the banks, funds and insurance companies that sold it are out $365 billion, which is the difference between the price of Lehman's bonds as set in the auction and the remaining 91.375 cents in face value. It won't be easy to draw up a quick winners and losers column, however. Buyers of insurance are also sellers and vice versa.... [read full story]