[dorlomin]

And what impact will this have on other companies valuation of them when stating there capital and in terms of the money they have swapped with the federal reserve for MBS and CDO's.


Also what impact will the break up of Lehman and perhaps AIG have on other companies ability to raise capital by selling off assets. Id have thought it could really hurt banks and other firms needing to raise capital but not yet in a crisis.

And apologies if my questions seem a bit basic for this forum.

[DantesPeak]

Bankruptcy courts have wide discretion on how to handle the wind up of financial firms. Generally, financial firms file Chapter 7 bankruptcy - which is a total liquidation. Lehman did not. Maybe some legal experts here can address that.

Anyway it's my understanding that at first CDO counter-parties tried to follow the Enron model - which is netting out derivative trades between brokers/dealers with cash (and not asking for full settlement value or contract terms).

But as for now, the remaining CDOs live on. Counter-parties can seek fullfillment of CDOs as per contract, but maybe not get it.

There are many unknowns as to how the future of this bankruptcy will be handled.

[RdSnt]

The biggest danger, as I understand it, is that the bankruptcy proceeding will force the valuation of all the liabilities that Lehman is on the hook for.
This then puts a value on a very large amount of phantom paper, CDO's, derivatives and such.
I'm not sure they can figure this out, it's extremely complex, with counterparty holders and tranches of packaged obligations all mashed together.

I would even suggest that the Federal government is chosing to bail these companies out, not because they are too big, but to avoid the evaluation process to start.