"The Unregulated Free Market Did Not Collapse"

An old friend of mine, Scott Grannis, emailed me earlier with some interesting insight on last Friday's successful settlement of $400 billion worth of Lehman credit default swaps. Scott is a wise veteran of the markets and the former chief economist at Western Asset Management.

It's definitely worth a read.

Best news of last week: the unregulated free market did not collapse

It's an arcane topic and that's probably why you haven't heard much about it, but the settlement of $400 billion of credit default swaps on Lehman bonds that occurred a few hours prior to Friday's market close was a major positive event.

...For the past two weeks the market had feared the results of an auction that was to be held last Friday to determine the settlement price of credit default swaps on Lehman bonds, an event that was triggered by the government's earlier takeover of Lehman. Some $400 billion in CDS contracts were at stake. No one really knew who was going to end up owing how much money to whom. Major dealers might end up on the hook for hundreds of billions if their counterparties failed.

...In the end, it was almost a nonevent. In the greatest story of this crisis not yet told, the private market mechanism set up to handle the settlement of the swaps worked perfectly....

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