Cornerstone Worldwide sources believe the Asian-based wealth management firm is expecting forthcoming CDS auctions to herald the return of systemic risk despite the orderly unwinding of obligations relating to credit default swaps sold on Lehman Brothers’ debt.
One of the sources said that Cornerstone Worldwide believe the 350 counterparties were able to settle in full because many liquidated holdings of equities and commodities to raise cash but with many more default auctions to come, counterparties may be out of assets to sell.
The credit default swap market’s opacity has been blamed for the stubbornness demonstrated by interbank spreads which have been slow to respond to unprecedented dollar liquidity injections by the world’s central banks.
Violent declines in world equity and commodity markets were largely blamed on forced-selling by banks and hedge funds trying to raise sufficient cash to meet liabilities under CDS contracts.
Cornerstone Worldwide sources pointed to the forthcoming auctions for Washington Mutual and three rescued Icelandic banks as cause for concern.
