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Swaps Pay $3.6 Billion At Most on U.S. Trigger, ISDA Says

Sellers of credit-default swaps protecting against a U.S. default would pay $3.6 billion at most if the government failed to meet its obligations, according to the International Swaps and Derivatives Association’s David Geen.

“That’s the maximum potential payout there could possibly be, even if after the auction we would hold, the value of the U.S. government bonds was zero, which obviously wouldn’t be the case,” Geen, the general counsel of the group of banks and investors that governs the market, said today in a Bloomberg Television interview. “It’s a chunky amount, but in the scheme of things, it’s not large.”

Banks, hedge funds and other money managers had bought and sold credit swaps protecting a net $3.6 billion of obligations of the world’s biggest borrower as of Oct. 4, according to the Depository Trust & Clearing Corp., which runs a central repository for the market.

The cheapest Treasuries that would probably be eligible to set the swaps contract’s value have been trading at about 83 cents on the dollar, Barclays Plc analysts wrote in an Oct. 9 report. That means traders betting on a U.S. default through credit swaps would receive an aggregate $612 million.

After estimates from analysts that as much as $400 billion in credit swaps were tied to Lehman Brothers Holdings Inc., raising concerns that hedge funds and others would struggle to make good on the bets, DTCC said only $5.2 billion had to be paid out.

The cost of one-year swaps on the U.S. government have climbed to a mid-price of 60.5 basis points as of 12:19 p.m. in New York, from 34 basis points on Oct. 1, according to data from CMA, which is owned by McGraw Hill Financial and compiles prices quoted by dealers in the privately negotiated market.

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