Sellers of insurance on bonds issued by bankrupt Lehman Brothers Holdings Inc. are now likely to face demands that they pay out more than 91 cents on the dollar to buyers of those insurance contracts.
That's the upshot of an unusual auction process Friday that established the price for defaulted Lehman debt, and in turn potential claims payouts on insurance protecting that debt, known as credit default swaps.
Certainly, some firms will take a hit because of the pricing, potentially amounting to billions of dollars in combined losses. In the Lehman auction, participants included most major financial firms from around the world. But it's too early to tell which companies will be on the hook or for how much.
"Where this is helpful is this is the first real-world situation where we see how market participants handle settling CDS," said Barry Silbert, chief executive of SecondMarket Inc., a marketplace for trading illiquid assets.
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