More news trickling out ..
By David Ellis, CNNMoney.com staff writer
October 23, 2008: 11:04 AM ET
AMERICA'S MONEY CRISIS
* WaMu swap sellers may sidestep big loss
* New foreclosure plan on tap
* Greenspan: It's a 'credit tsunami'
* GM signals more cuts
* Initial unemployment claims up
Wachovia reports $24B lossvideo
Wachovia reports $24B loss
More Videos
NEW YORK (CNNMoney.com) -- Investors who wagered that Washington Mutual would mange to survive the latest market turmoil may not have to pay as dearly as some had feared.
Based on preliminary results of an auction held Thursday, investors who sold default protection on the now-defunct savings and loan will have to pay 63.625 cents on the dollar, according to Creditfixings.com, suggesting a loss of just over 36%.
Final results of the auction will be released later Thursday afternoon and it's possible that the actual settlement will be lower.
But Brian Yelvington, an analyst with research firm CreditSights, said that the preliminary results were an encouraging sign.
"The initial auction results are not too far off from where [WaMu] bonds were trading in the open market yesterday. The auction mechanism appears to be working well," he said.
The WaMu auction represents the latest peek at the long-ignored market for credit default swaps - complex financial instruments used by bondholders to protect against a company default.
Investors around the world paid a lot of attention to a similar auction for Lehman Brothers on October 10 since it represented an important test of the largely unregulated credit default swap market, one that some estimate to be worth $55 trillion.
The auction valued Lehman's credit default swaps at just 8.625 cents on the dollar, which means that some investors who sold default protection on Lehman were looking at a more than 91% loss on these contracts.
Stocks were whipsawed that day and some traders blamed concerns about the auction and the impact it would have on many already struggling banks for much of the volatility that day.
Buyers and sellers of Lehman credit default swaps managed to settle those claims earlier this week without any major fallout amongst financial institutions or the broader market, which many feared could happen.
Some $5.2 billion is expected to trade hands between investors that bet on a Lehman default, according to the Depository Trust and Clearing Corporation, which handles trades in over-the-counter markets such as credit default swaps.
Over 500 parties participated in Thursday's WaMu auction, including major global financial institutions such as Bank of America (BAC, Fortune 500), Barclays (BCS), Citigroup (C, Fortune 500) and Goldman Sachs (GS, Fortune 500).
That number dwarfed the more than 350 banks and investors that took part in Lehman's auction. What remains unclear is whether the payments related to the WaMu's credit default swaps will surpass that of Lehman.
Yet in some ways, Thursday's auction brings the WaMu tale one step closer to the end.
Saddled by toxic home loans, WaMu struggled for months and tried numerous remedies to shore up its problems, including a $7 billion private equity investment and the expulsion of long-time CEO Kerry Killinger.
But fallout in the U.S. mortgage market and waning confidence in the company proved too much for the Seattle-based thrift.
Washington Mutual (WM, Fortune 500) collapsed on Sept. 29, making it the biggest bank failure in the nation's history. Federal regulators seized the company's banking operations, only to turn around and sell them to JPMorgan Chase (JPM, Fortune 500) for $1.9 billion. To top of page
AI
