Stocks fading again

Dow is back over 200 points. Today's action apparently is being impacted by today's auction involving credit default swaps. The auction is to determine the size of payments that buyers of default protection can claim – and sellers must shell out – after Lehman filed for bankruptcy. These are the folks who made bets on whether Lehman bonds would go south. Based on the initial auction this morning, credit swap sellers might be on the hook for more than 90 cents on the dollar. One big question: who exactly are these sellers and do they have the money to pay up? Nobody knows. It's the unregulated market of credit default swaps that has contributed to the current disaster. From Bloomberg:

More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly how much is at stake because there's no central exchange or system for reporting trades. It's that lack of transparency that has increased the reluctance of financial institutions to do business with each other, exacerbating the global credit crisis and prompting calls for regulation of the market. The list of participants includes Newport Beach, California- based Pimco, 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.

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Settlement of Lehman contracts may lead to protection sellers paying out as much as $220 billion, assuming a 20 percent recovery on the U.S. bank's senior debt, according to Andrea Cicione, a London-based credit strategist at BNP Paribas SA. "Banks can go to the Federal Reserve, or use the commercial paper market where it is still functioning" to meet protection payments, said Cicione. "But fund managers r hedge funds, once they've used their cash, have only one option, to sell assets."