The collapse of Lehman Brothers has exposed the weaknesses of the credit default swap market, as the bank’s counterparties are being pressured to buy more credit insurance.
“It is a cannibalistic frenzy,” one lawyer representing some of the Lehman counterparties in disputes with the Lehman told The Financial Times. “The credit default swap market has taken on a life of its own. There are huge exposures out there.”
“Many investors had long and short CDS positions with Lehman which are terminated post Lehman’s default,” says a recent report from JPMorgan Securities. “This leaves investors suddenly long or short on credit risk. Investors need to reset these positions with other counterparties, sometimes at a loss.”