The news over the weekend is there was no government bailout for Lehman Brothers, nor was there any private buyout either, after Bank of America and Barclays walked away from the table. So they will be filling for bankruptcy and liquidated.
Since Lehman’s debt does not equal its assets, credit default swaps will be triggered, which I do not recall happening so far in this credit unwind, since failed financial firms have been bailed out or bought out with government backing up to this point. Credit default swaps (of which CDOs are included in the class, discussed in this post) are debt insurance funded by private investors—in this case on Lehman’s bonds. So if Lehman goes bankrupt, their bond holders can be reimbursed for losses by private counterparties, according to prior arrangement.
Merrill Lynch fared better. The brokerage will be bought out by Bank of America for $44 billion.
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