Lehman: The Counterparty Risk

As we write this, CNBC is reporting that Lehman Brothers, Inc. (LEH) has a notional amount of outstanding OTC positions of nearly $800 billion. Since Lehman is going into bankruptcy, what does that mean for the rest of the financial markets?

Each of these trades has a counter party, an institution that is expecting to pay off or get paid according to the terms of the agreement.

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