An auction today may define the total size of payouts buyers of default protection are entitled to in the wake of Lehman’s bankruptcy filing. If Lehman's $128 billion of bonds were trading yesterday at an average of 13 cents on the dollar (which they were) does that mean credit swap sellers must pay 87 cents on the dollar?

The collapse of Lehman Brothers Holdings Inc. may force sellers of credit-default swaps including Pacific Investment Management Co. to make the biggest- ever payout in the $55 trillion market.

An auction to be held today will determine the size of the payments buyers of default protection can claim after New York- based Lehman filed for the largest bankruptcy with $618 billion in debt. Lehman's $128 billion of bonds were trading yesterday at an average of 13 cents on the dollar, indicating credit swap sellers may have to pay 87 cents on the dollar.

"That's a big hit," said Byron Douglass, a strategist at Credit Derivatives Research LLC in Walnut Creek, California. He follows the market for collateralized debt obligations that sold protection on Lehman debt. The payment compares with a typical bond recovery of about 40 cents on the dollar and a payout closer to 60 cents, Douglass said.

More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly how much is at stake because there's no central exchange or system for reporting trades. It's that lack of transparency that has increased the reluctance of financial institutions to do business with each other, exacerbating the global credit crisis and prompting calls for regulation of the market.

The list of participants includes Newport Beach, California-based Pimco, manager of the world's largest bond fund, Chicago-based hedge fund manager Citadel Investment Group LLC, and American International Group Inc., the New York-based insurer taken over by the government, according to the International Swaps and Derivatives Association in New York.

Hedge funds, insurance companies and banks typically buy and sell credit protection, which is used either to insure a bond against default or as a bet against the company's ability to pay its debt.

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