Lehman CDS Settlement - Ouch!

Yesterday auctions were held by the ISDA to establish a settlement price for CDS written against Lehman bonds (Bloomberg, FT, NYTimes). The auction set the value of the target bond at 8.625 cents on the dollar meaning that writers of CDS have to pay out 91.375 cents on each dollar of coverage written. Given recent trading in Lehman debt, some had expected payouts to be closer to 87 cents on the dollar.

Estimates for total payments related to the Lehman CDS settlement range from $250-600 bln. Analysts suggested that most sellers of CDS have probably written down their positions and posted collateral to meet these obligations. Sellers are supposed to mark down their positions daily. While most companies' positions aren't known, Pimco announced it had $105.4 mln of Lehman CDS exposure. Bermuda-based Primus Guaranty announced it had guaranteed $80 mln of Lehman debt. Primus also sold $215 mln of coverage on Fannie and Freddie, as well as $68.2 against Kaupthing. As of last week, Primus said it had $820 mln on hand to settle claims.

The auctions were run by Creditex Group and Markit Group. More than 350 banks and investors signed up to participate in the auction.