Tuesday, 21 October 2008 is going to be marked in history as a huge day in matters of U.S. finance. Tuesday is the day that Lehman Brothers "credit default swaps" (CDS) must be settled.
CDS were insurance-like guarantees provided by banks and hedge funds as a source of easy revenue for themselves. Offering the CDS meant that banks and hedge funds agreed to cover any default by a major investment house like Lehman Brothers. The banks and hedge funds charged "premiums" to provide this "protection" which they never believed would ever be needed to cover anyone. Then Lehman Brothers went bankrupt. OOOOPS.
Last week, it was determined that Lehman Brothers assets were only worth about 8 cents on the dollar, meaning the credit default was about 92 cents on the dollar. . . . . times about four hundred billion dollars!
Tuesday is the day that the CDS' must be settled. Tuesday is the day that whoever agreed to cover a default by Lehman Brothers, must actually fork over the cash money.
Since the CDS markets are so intertwined and convoluted, it is not yet clear who has to pay how much. Tuesday will change all that because whoever is on the hook to pay, must pay on Tuesday.
Look for all hell to break loose in US markets because some very big bank(s) and very big investment house(s) WILL fail . . . . . . big.