Fearing Lehman bankrutpcy, derivatives traders hold emergency...

Fearing Lehman bankrutpcy, derivatives traders hold emergency session

Sunday, September 14, 2008

http://www.reuters.com/article/newsOne/idUSN1444498020080914?virtualBrandCha
nnel=10272&sp=true

NEW YORK -- A rare emergency trading session opened Sunday afternoon to
allow Wall Street dealers in the $455 trillion derivatives market reduce
their exposure to a potential bankruptcy filing by Lehman Brothers.

U.S. regulators and bankers were making last-ditch efforts on Sunday to
prevent toxic assets from ailing Lehman Brothers spilling into global
markets and rupturing investor faith in the international financial system.

"This is an extremely, and I stress extremely, rare event. It also speaks to
the more general notion that, in today's highly disrupted financial markets,
the unthinkable is thinkable," said Mohamed El-Erian, the chief executive of
Pimco, the world's biggest bond fund, based in Newport Beach, California.

The session opened at 2 p.m. and was due to run until 4 p.m. New York time,
according to the International Swaps and Derivatives Association.

Trading involved credit, equity, rates, foreign exchange, and commodity
derivatives. ISDA confirmed a "netting trading session" was taking place for
over-the-counter derivatives, in which trades that offset each other are
settled.

ISDA estimates the OTC derivatives market excluding commodities has a value
of $455 trillion.

Market sources said the special session was initiated by the Federal
Reserve.

The aim is to reduce risk associated with a potential bankruptcy filing by
Lehman Brothers Holdings Inc.

"Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New
York time Sunday (0359 GMT)," said the statement. "If there is no filing,
the trades cease to exist."

Britain's Barclays Plc, which had appeared to be the frontrunner to take
over Lehman -- excluding its bad mortgage-related assets -- pulled out of
the bidding early in the afternoon, according to a person familiar with the
matter.

That raised the risk of a Lehman bankruptcy. Lehman hired law firm Weil
Gotshal & Manges to prepare a potential bankruptcy filing, the Wall Street
Journal reported on Saturday in its online edition, citing a person familiar
with the matter.

The special session "is a way to offset the risk between the remaining large
banks and insurance companies and fund managers prior to the markets opening
in Asia," said Mark Grant, managing director of structured finance at
Southwest Securities, based in Dallas.

Grant is expecting a turbulent session when the U.S. markets reopen for
business on Monday.

"No one has any idea about the credit quality of the assets in Lehman's
portfolio and no one has a handle about the size of the CDS contracts," he
said.

"The market is going to be spooked. People will be fearful and no one
outside a very small group of people knows what Lehman going into
liquidation will mean."

If there is a forced sale or liquidation, "this could set off another round
of writedowns globally."