10 Oct 2008, David Benyon, Operational Risk & Regulation
LONDON – The FTSE 100 was down 8% by mid-morning as London attempts to settle hundreds of billions of pounds worth of credit default swaps (CDS) in the wake of the collapse of US investment bank Lehman Brothers on September 15.
The settlement coincides with the relaxation of the Securities and Exchange Commission (SEC)’s ban on short selling, which saw US bank Morgan Stanley drop 26% on the New York Stock Exchange by the close of yesterday.
The scale of losses to Lehman counterparties and where those losses will fall has been the subject of increased speculation over the past fortnight. Uncertainty is increasingly translating into speculation in the markets themselves, as it is reported that Lehman’s collapse will represent the biggest ever payout in the $55 trillion CDS market.
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