October 7, 2008

Thursday is "D-Day" . . . . . as in Derivatives

UPDATE: Thursday, October 9, 2008 1:15 PM EDT. . . . . The settlement of Lehman default swaps has been re-scheduled. It will take place tomorrow, Friday, October 10 with the final info released at 2:00 PM EDT. . . . .

This Thursday, derivatives of Lehman Brothers get settled. With the huge default that took place when Lehman filed Bankruptcy, credit default swaps are going to have to pay out billions.

Analysts are saying that the credit default swap folks will have to pay out at least 15 to 20 cents on the dollar for Lehman's bad debt. In reality, they could have to pay much more. These payouts could bring down the entire derivatives house of cards; including many big banks.

In anticipation of this problem, the fed has doubled the amount it lends overnight to banks. They doubled it last week, so they know a real problem is coming and they're trying to smooth it out.

Whether things fall apart this Thursday or Friday remains to be seen but it doesn't look good. Hold on to your hats, folks, it's going to be a wild ride.