Anti-climax of the Lehman Brothers Credit Default Swap Scare

[digg-reddit-me]Just a few weeks ago, today was seen as a pivotal day in managing the economic crisis. The deadline for all credit default swaps to be settled on debt in the Lehman Brothers bankruptcy is today. Much of the fear that swirled about disrupting markets several weeks ago centered on who would be able to survive this “settling.”

This morning, Reuters is reporting that these fears are overstated. One key reason is that a number of the major players who were involved both bought and sold credit default swaps – thus accomplishing to some extent what they were supposed to do – hedging their bets in the event of a catastrophic outcome. Despite the fact that an estimated $400 billion in credit default swaps on Lehman exist, some industry observers estimate less than $6 billion will actually change hands as many institutions have effectively hedged their losses.

Of course, this is a delicately balanced system – and if one party has not effectively hedged their losses, it could trigger another bout of panic as any banks who were expecting to be paid by the party that did not hedge don’t get paid – thus increasing their losses.

But with the stock market surging and the voices of calm and reason seeming to prevail for the time being, with liquidity apparently restored to the financial system and the federal government willing to step in to prevent another major player from collapsing – today’s deadline doesn’t seem as apocalyptic as it did just last week.