The cost on insuring Lehman’s debt has climbed from 130 basis points in late April to 387.5 basis points today. The credit default swaps, which are contracts insuring Lehman’s senior debt, appear to show high levels of skepticism about the firm’s financial health, according to some traders.
Yesterday the cost of insuring $10 million of Lehman senior paper for five years was running around $327,500. Today it has climbed up to $387,500. This fifty basis point shift far outstrips the movements in the credit default swaps at other Wall Street firms, which almost universally widened today.
“It’s the uncertainty about the size of their write-downs. There’s a lot more to come, it’s affecting the entire fixed-income market, and Lehman is at the top of everyone’s list,” said Mirko Mikelic, portfolio manager for Fifth Third Asset Management in Grand Rapids, Michigan.
The news that Lehman is shopping Neuberger Berman to private equity funds is not helping the firm. Despite the possibility that it could put more money in Lehman’s coffers, the sale seems to have encouraged worries that Lehman’s financial health is seriously impaired. Many in the debt markets now believe that financial firms may be forced to write-down another trillion of asset values, which would bring the total number up to $1.5 trillion.
Lehman’s stock is trading down around 10% today also. Some market watchers urge caution about trying to assign reasons to pricing movements. (The official DealBreaker policy is never to assign post-hoc rationales to financial instrument pricing but we break that rule a lot.)
“Of course this crazy desire for narrative and causation is exactly the problem,” Felix Salmon at Portfolio told us this afternoon. “There isn’t always a reason.”
Over on Market Movers, Felix explains how this drive to produce a market narrative can be misleading.