Brentwood Group believes that banks are continuing to hoard cash in preparation for payouts of up to $400 billion on credit default swap contracts linked to the defunct investment bank, Lehman Brothers.
Traders at Brentwood Group are thought to believe that the prospect is partly responsible for 3-month LIBOR rates remaining stubbornly high in credit markets despite coordinated rate cuts and additional measures taken by global central banks earlier in the week.
The contracts will be settled on Friday, and with the recovery value on Lehman bonds currently estimated at about 10 cents on the dollar, the pay-out by banks and other sellers of credit protection on Lehman could reach a gross $360bn.
Brentwood Group believe the recent auction of bonds associated with Freddie Mac and Fannie Mae, the two giant mortgage facilitators nationalized by the US Treasury last month, went well because of the explicit guarantee provided by the government. Lehman Brothers bonds, however, have no such guarantee.
Although Brentwood Group have reportedly advised clients to avoid the banking sector, recent coordinated attempts to avert systemic breakdown have convinced the Asian-based wealth manager that the acquisition of keenly priced stocks represents an opportunity for impressive long-term return on investment consistent with their strategic goals .
