Credit-Default Swaps Surge Most Ever as Lehman Threatens to Unravel Market

[marmar]

Credit-Default Risk Soars After Lehman Files for Bankruptcy

By Shannon D. Harrington and Abigail Moses


Sept. 15 (Bloomberg) -- Concern the $62 trillion credit derivatives market will unravel increased after Lehman Brothers Holdings Inc. filed for bankruptcy.

Benchmark gauges of corporate credit risk rose by a record in Europe, and traded near an all-time high in North America, after an emergency trading session in New York yesterday where investment banks sought to minimize losses from Lehman's collapse. 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 part of so-called over-the-counter derivatives, 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., said in an interview with Bloomberg Radio yesterday. ``It induces a tremendous amount of volatility and uncertainty.''

The Markit iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings jumped by as much as 89 basis points, and was up 68 basis points to 614, according to JPMorgan Chase & Co. prices at 1:07 p.m. in London. ......(more)

The complete piece is at: http://www.bloomberg.com/apps/news?pid=20601087&sid=aBv7a_te8fiI&refer=home

[El Pinko]

1. I don't think most people quite get what "credit-default swaps" are...

But basically they are a financial instrument that became popular in the last decade or so that allowed these financiers to loan money that was backed by "collateral" which was actually a bundle of more debt, whic in turn was backed by another bundle of "collateral" that was also actually more debt, etc. etc. Correct me if I'm wrong in my understanding of it...

[marmar]

2. Sounds about right to me based on my reading on an explanation of that market....

.... in a previous Bloomberg story.