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October 21st is the day to watch. Lehman debt having priced at below $0.09 on the dollar, CDS contracts will have to settle now. Vipal Monga over at The Deal hints that a notional amount figure might run as high as $400 billion. (Total senior unsecured debt outstanding at Lehman was something like $110 billion with another $18 or so billion in subordinated notes).
This is problematic. There was some worry about these CDS contracts before, but now that the recovery price will seemingly exceed $0.90 on the dollar, several counter-parties could be on the hook for some serious money.
Further, because CDS contracts are OTC arrangements, there's no central clearing party. Lehman might, for instance, be a counter-party in several of the transactions.
Somewhere out there, $350 billion or so in cash is going to have to be raised, which might go a long way to explaining the liquidity issues floating around these last many days.
It will make for an interesting month.
CDS Settlement; Market Edgy [The Deal]


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