Regulators and practitioners alike have spent much of 2008 fretting about how the CDS market would perform in the event of a big counterparty default (see Credit default swaps: On dangerous ground Euromoney, August 2008). Last month the system was more than put to the test when credit events triggered the unwind of not one but three big CDS counterparties. The "conservatorship" of mortgage agencies Fannie Mae and Freddie Mac rapidly followed by the bankruptcy of Lehman Brothers has placed more of a strain on the infrastructure of the CDS market than anyone – even its harshest critics – could have expected it to deal with.
According to Citi analysts there is roughly $200 billion of index CDS outstanding that references Fannie and Freddie and $300 billion in single-name exposure. They also estimate $200 billion in tranche exposure for Lehman, which gives a ballpark estimate of $700 billion...
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