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October 21, 2008

What if There Was a CDS Crackup and No-one Came?

There is no stopping the CDS crackup chatter. While credit default swaps could do with a great deal more transparency, one data point we all need to deal with is the non-world-ending consequences of the Lehman bankruptcy.

Today is the last day for money to change hands as a result of default swaps being triggered related to the Lehman filing, and it looks like the market handled it in a surprisingly orderly fashion. Collateral was adjusted and traded on a regular basis from the bankruptcy filing date forward, and, as a result, while a great deal of money still changed hands -- somewhere between $6- and $60-billion, depending on who you ask -- it currently doesn't look like any counterparty was made insolvent by its CDS-writing actions.

Does that make credit default swaps a non-issue? Far from it. But in my never-ending search for disconfirming data, the Lehman non-event -- so far, anyway -- is a useful data point to keep in mind the next time a default event triggers an unwinding.

More here.

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