Derivatives: The Great Unwind

By Morgan, Blown Mortgage

The market was up strong yesterday. Other than the shares of bank stocks, you have to wonder why. The worldwide central bank bailout is not intended for the equity investor, or general public, or business, or you, or me. It’s intended for banks, ostensibly to spur lending, but more likely to keep them afloat through next week’s Great Derivatives Unwind. This has got to be a big part of the motivation of the CBs to provide unlimited lending to banks.

Distracted by worldwide stock market crashes, attention shifted away from Lehman’s derivatives’ payouts scheduled for October 21. Recovery value has been set at 8.625 cents per $1.00, which means that sellers of credit protection must pay 91.375 cents to the buyers (according to Creditex, the company that holds auctions).

More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. The list of participants in the auction includes Newport Beach, California-based Pacific Investment Management Co. PIMCO, manager of the world’s largest bond fund, Chicago-based hedge fund manager Citadel Investment Group LLC and AIG, the New York-based insurer taken over by the government, according to the International Swaps and Derivatives Association in New York. Read more….