http://www.nytimes.com/2008/02/17/business/17swap.html?_r=2&hp=&oref=slogin&pagewanted=all

I intended to comment on this, but forgot, and it wasn't until SeekingAlpha mentioned it that I though I'd comment on it

http://seekingalpha.com/article/65104-a-misleading-chart-on-credit-default-swaps

"Market participants worked out an auction system where settlements of Delphi contracts could be made even if the bonds could not be physically delivered. This arrangement was done at just over 36 cents on the dollar; so buyers of protection on Delphi who did not have the bonds received $366.25 for every $1,000 in coverage they had bought. Had they been valuing their Delphi insurance coverage at $1,000 per bond, they would have had to write off that position by $633.75 per $1,000 bond."

There are two problems with this. Firstly as the article points out, noone expects the recovery rate to be zero (unless it has been specified in the contract). Furthermore, it is implied the article implied that the recovery rate is 63%, when in fact BIS say the recovery was 53% (page 46)

http://www.bis.org/publ/qtrpdf/r_qt0606d.pdf

"Under certain circumstances, a shortage of
deliverable debt can drive up the price of such paper beyond the level that
might otherwise be justified by the expected size of repayment. In the case of
Delphi, the settlement price of 63.5% (and an average CDS recovery price of
53.5%) was considerably higher than the settlement prices of other firms from
the same sector or than rating agencies’ estimates of the ultimate recovery
rates on Delphi’s debt."

so, higher than typical 40% assumed recovery rate, but the 40% is a guide not a rule.

A more recent auction - recovery rate was ~40%

http://www.creditfixings.com/information/affiliations/fixings/auctions/cds-2008/cds2.html

http://uk.reuters.com/article/governmentFilingsNews/idUKN1928853020080219

Markit do good daily updates for those that don't already read them

Correction: The recovery rate for the index auction was 63.5, but the average (which would include CDOs where the valuations are performed independently) was 53.5%

http://www.securitization.net/pdf/Nomura/CDO-CDS_20Mar06.pdf