(snip)"Oct. 10 (Bloomberg) -- Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion market.

An auction to determine the size of the settlement on Lehman credit-default swaps set a value of 8.625 cents on the dollar for the debt, according to Creditfixings.com, a Web site run by auction administrators Creditex Group Inc. and Markit Group Ltd. The auction may lead to payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said.

While the potential payout is higher than 87 cents on the dollar suggested by trading in Lehman's bonds yesterday, sellers of protection have probably written down their positions and put up most of the collateral required, said Robert Pickel, head of the International Swaps and Derivatives Association.

``I don't think it buries anybody,'' said Brian Yelvington, a strategist at CreditSights Inc., a bond research firm in New York.

More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly who has what at stake because there's no central exchange or system for reporting trades. Sellers are required to post collateral, or pledge assets, to the buyer of protection, known as the counterparty, on the other side of the trade if the value of their positions declines. Because Lehman's bonds had already fallen, the collateral has probably been posted, Yelvington said.

Pimco, Citadel

The list of participants in the auction includes Newport Beach, California-based Pacific Investment Management Co., manager of the world's largest bond fund, Chicago-based hedge fund manager Citadel Investment Group LLC and American International Group Inc., the New York-based insurer taken over by the government, according to the International Swaps and Derivatives Association in New York.

Hedge funds, insurance companies and banks typically buy and sell credit protection, which is used either to insure a bond against default or as a bet against the company's ability to pay its debt.

The payments ``are insignificant when put into the context of the trillions of dollars of payments that are made through settlement systems each and every day,'' Pickel said on a conference call with reporters today.

Fears `Overblown'

Some funds may be forced to dump assets to meet the payment demands if they haven't hedged, BNP Paribas's Cicione said.

``Banks can go to the Federal Reserve, or use the commercial paper market where it is still functioning'' to meet protection payments, said Cicione, who said a 9.75 cent recovery rate would lead to payments of about $270 billion. ``But fund managers or hedge funds, once they've used their cash, have only one option: to sell assets.''

The Pimco Total Return Fund, with about $130 billion under management, has written protection on a face amount of $105.4 million of Lehman debt as of June 30, according to regulatory filings. Pimco spokesman Mark Porterfield didn't immediately return a call seeking comment.

A unit of Primus Guaranty Ltd., a Bermuda-based company that has sold more than $24 billion in credit-default swaps, said last month it guaranteed $80 million of Lehman debt. The firm sold protection on $215 million of Fannie and Freddie debt and $16.1 million on WaMu. Yesterday, it said it also had made bets of $68.2 million on Kaupthing Bank hf, which the Icelandic government seized.

Primus

Primus said last week it had $820 million in cash and liquid investments to meet claims on the contracts. The stock was halted from trading on the New York Stock Exchange yesterday after falling to 99 cents. The shares, down 89 percent this year, slumped 15 cents, or 17 percent, to 75 cents.

The failures of Lehman, once the fourth-largest securities firm, and Seattle-based Washington Mutual Inc. as well as the government takeovers of Fannie Mae, Freddie Mac and Iceland's biggest banks have provided the 10-year-old credit-default swaps market with its biggest test to date. The use of credit derivatives has grown more than 100-fold in the past seven years as investors began using the swaps to bet on companies' creditworthiness. "(snip)


^^^ the bottom line is that settlement auctions held earlier this week set the 'recovery value' of Lehman assets at a level of NINE CENTS on the dollar. Now the other financial institutions that wrote credit default swaps on Lehman in previous years must now pay out NINETY ONE CENTS on the dollar for however much 'insurance' they wrote. What this news blurb doesn't mention is that European financial institutions were major players in the CDS markets in previous years, and now face HUGE 'insurance' payouts. To make matters worse for them, they must pay in US dollars ... which is creating a fierce demand for US dollars, which in turn is increasing the US dollar's exchange rate value while at the same time tanking the Euro. And the 800 pound gorilla in this situation is the fact that many of the European financial institutions who wrote CDS 'insurance' and pocketed the associated fees currently don't have the money to make good on the required 'insurance' payouts !