| The huge positions on the credit default swaps (CDS) have raised concerns
about the ability of the market to settle major entities’ defaults. The near-failure of AIG and
the bankruptcy of Lehman Brothers in 2008 have revealed the exposure of CDS’s buyers
to counterparty risk and hence highlighted the necessity of organizing the market, which
triggered a large reform process. First we analyse the vulnerabilities of the market at the
bursting of this crisis. Second, we unravel the auction process implemented to settle defaults,
the strategies of buyers and sellers and the links with the bond market. We then study the way
it worked for key defaults, such as Lehman Brothers, Washington Mutual, CIT and Thomson,
as well as for the Government Sponsored Enterprises, which reveals some oddities in the final
prices. Third, we discuss the ongoing reforms aimed at strengthening the market resilience. |
Abstract |
