Lehman Swap Settlement Goes Better Than Expected

Finally. Some good news. The settlement of the Lehman Brothers credit default swaps didn’t trigger a global meltdown.

From Market Watch:

A settlement in billions of dollars in Lehman Brothers credit-default swaps finalised without any big hitches, an industry clearing organisation said Tuesday, adding a note of support to the recent recovery in credit markets.

“The liquidation process for forward open commitments involving Lehman has been completed,” said the Fixed Income Clearing Corporation, a unit of the Depository Trust & Clearing Corp., in a notice on its Web site.

It said it was “pleased to announce that no loss allocations will be imposed on [mortgage-backed securities division] member firms as a result of the liquidations of these forward trades.”

The exchange between the buyers and sellers of credit-default swaps, a type of derivative contract that pays out when a company reneges on its debt, had spooked markets Tuesday. Some investors worriedsellers would be unable to come up with the cash to pay their counterparties, and these no-shows would usher in a new round of bank or fund failures.

This type of domino effect turned what started as a U.S. housing market collapse into a global credit crisis.

“Settlement of Lehman’s CDS is what has the market on the nervous side,” said Peter Cardillo, chief market economist at Avalon Partners, said earlier Tuesday.

But don’t get too excited about this yet. Even if fears of losses were exaggerated we won’t know the true cost for several months. Most probably won’t be public until companies post fourth quarter earnings.




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