The insurers of Lehman Brothers’ debt face a claims bill of about $360 billion (£211 billion) after an auction of the bankrupt US brokerage’s borrowings determined that they were only worth 9.75 cents on the dollar.

Lehman’s bankruptcy filing last month sent its bond values plunging as most of the investment banking assets that supported the debt were purchased by Barclays, leaving debt holders at the abandoned holding company with little to reclaim.

About 350 banks and investors are thought to have insured an estimated $400 billion of Lehman’s debt through complex derivatives, known as credit default swaps (CDS). These include Pacific Investment Management, the manager of the world’s largest bond fund, Citadel, the US hedge fund, and American International Group, the insurer that the US Government recently bailed out with two loans totalling about $123 billion.

A CDS acts as an insurance policy on a bond on loan. For an annual fee, about 8 per cent of the amount insured in the case of Lehman Brothers’ debt, the CDS seller agrees to repay the face value of the debt in exchange for the underlying securities if the debt issuer defaults.

The CDS seller is therefore liable for the difference between the face value and the value of the underlying loans. CDS are not regulated and can be traded freely. As a result, it is unclear how many CDS holders have sufficient capital reserves to meet their claims obligations.

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