Friday, September 12, 2008

Lehman is risky . . .

. . . which is not exactly news . . .

Lehman Bond Default Risk Soars, Credit Derivative Prices Show

By Abigail Moses

Sept. 12 (Bloomberg) -- The cost of default protection on bonds sold by Lehman Brothers Holdings Inc. soared, according to prices for credit-default swaps. Contracts on the securities firm jumped 158 basis points to 662, according to CMA Datavision prices at 9:45 a.m. in New York.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

. . . But US Treasury money being deemed increasingly risky most certainly is news

Treasury credit default swaps hit record: CMA

Tue Sep 9, 2008 2:07pm EDT

NEW YORK (Reuters) - The cost of protecting U.S. Treasury debt with credit default swaps hit record highs on Tuesday amid concerns about the cost of a government bailout of mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz).

Five-year credit default swaps for Treasury debt traded at an all-time high of 17.5 basis points, or $17,500 a year to insure $10 million of debt, up from 15.5 basis points on Friday before Sunday's bailout announcement, according to data from CMA DataVision. Treasury's 10-year credit default swaps traded at a record 21.4 basis points on Tuesday, up from 18.5 basis points Friday.

The cost to the U.S. government from taking on liabilities of the two companies was said to be behind the rise, according to Lou Brien, a strategist with DRW Trading Group in Chicago.

The Treasury Department committed to provide up to $200 billion to buy shares in the struggling companies as part of a takeover aimed at supporting the U.S. housing market and warding off more financial market turbulence.

The takeover could mean more government borrowing and federal exposure to risky mortgage assets that have been battered by the housing slump, analysts said.

Lehman source. US Treasury source.

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