It appears that today’s collapse was the result of fear over who has exposure to the Lehman Credit Default Swaps (which settle tomorrow (Friday).
http://en.wikipedia.org/wiki/Credit_default_swaps
Here is the timeline for how the settlement will play out tomorrow (Friday) –
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0841811720081008
What is means in English is the companies which sold insurance policies on the bonds of Lehman Brothers will know how much they will have to pay up tomorrow. $400 billion in Credit Default Swaps were written on Lehman Bonds! The fear is that the companies who sold the insurance will not have the money to pay up on October 21st. That would lead to several companies potentially going out of business this month and then all kinds of new risks enter the system.
I would not be surprised to see the tradable bottom show up tomorrow as the news of the Lehman CDS pricing evolves tomorrow. I will be looking for a capitulation tomorrow morning. If it shows up, then I may put some money to work. If it does not show up, then I stay in cash and wait for Monday…
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