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Time Magazine -- Business and Tech
Credit Default Swaps: The Next Crisis?
By Janet Morrissey Monday, Mar. 17, 2008

As Bear Stearns careened toward its eventual fire sale to JPMorgan Chase last weekend, the cost of protecting its debt, through an instrument called a CREDIT DEFAULT SWAP, began to rise rapidly as investors feared that Bear would not be good for the money it promised on its bonds.

Not familiar with Credit Default Swaps? Well, we didn't know much about Collateralized Debt Obligations (CDOs) either — until they began to undermine the economy. Credit Default Swaps (CDS), once an obscure financial instrument for banks and bondholders, could soon become the eye of the credit hurricane.

(Emphasis Added)

What else is being shredded before our eyes?

[continuing ...]

The CDS market exploded over the past decade to more than $45 trillion in mid-2007, according to the International Swaps and Derivatives Association. This is roughly twice the size of the U.S. stock market (which is valued at about $22 trillion and falling) and far exceeds the $7.1 trillion mortgage market and $4.4 trillion U.S. treasuries marked ...

Credit Default Swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default. They typically apply to municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and others.
Banks and insurance companies are regulated; the credit swaps market is not. As a result, contracts can be traded — or swapped — from investor to investor without anyone overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults.
All of this makes it tough for banks to value the insurance contracts and the securities on their books.
"These are the same institutions that themselves have either directly or through subsidiaries invested in the subprime market,"

(Emphasis Added)

Unregulated, hard to value, insurance contracts, that let the "security holders" hedge their bets, when Mortgages Companies actually go bad?

How is that legal?  Who pays off that downside bet, when Mortgage-backed investments, finally default?
Three guesses, anyone?

Credit Swaps Must Be Regulated Now, SEC's Cox Says
By Jesse Westbrook and David Scheer - Sept 23, 2008

Investors may use credit-default swaps to bet a company's financial condition will worsen. ... The swaps' value increases as perception of the company's stability deteriorates.
Cox today said investors who buy swaps without owning the underlying debt may be similar to Naked Short sellers who sell stocks they don't own or borrow. Such short sales can flood the market and illegally drive down stocks.

(Emphasis Added)

CDS -- are like "Naked Short" selling?  Huh?  

Naked Shorts basically have turned Wall Street into a Casino --
Traders can Bet a Stock will go down, and HELP TO drive the Price Down,
WITHOUT putting up any collateral AT ALL, or otherwise assume any normal risk in the trade.  

Naked Shorting

The illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short [Bet the Price will go Down]. But due to various loopholes in the rules and discrepancies between paper and electronic trading systems, naked shorting continues to happen.
Naked shorting is illegal because it allows manipulators a chance to force stock prices down WITHOUT regard for normal stock supply/demand patterns.  

(Emphasis Added)

So is SEC's Cox saying that rampant Credit Default Swaps (CDSs) having been manipulating Sub-Prime Investment Instruments downward WITHOUT regard for normal market principles, without assuming any of the risks, associated with their bearish bias?

Seems so ...
Why should Investment Banks assume their own risks --
when that lender of last resort can be tapped -- the Tax Payer!

The worse part about the this House of Cards is the extreme Leveraging that this Casino Mentality, has allowed to come into existence.

Sometimes "trading on Margin" is NOT a GOOD thing!

Total Notional Value Of Derivatives
Outstanding Surpasses
One Quadrillion

By Jim Sinclair - 06-10-2008

The notional value of all outstanding derivatives now totals approximately $1.144 QUADRILLION.

This appears to be Bank of International Settlement Spin to announce the largest gain in derivatives outstanding since they started to report. As of the last report it appeared that both listed and OTC derivatives was under $600 trillion. Now listed credit derivatives alone stood at $548 Trillion. The OTC derivatives are shown as $596 billion notional value, as of December 2007. One can only imagine what number they are at now.

Well we hit a QUADRILLION. We have more than $1000 trillion dollars in all derivatives outstanding. That is simply NUTS because notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. $548 trillion plus $596 trillion means $1.144 quadrillion.

This means that no OTC derivative house can be allowed to go broke. This means that whatever funds are required to rescue failing international investment banks, banks and financial entities will be provided.

Keep this economic law in mind. Monetary inflation proceeds price inflation and is its primary cause in economic history from Rome to present.

Nothing can stop the juggernaut of price inflation heading towards every nation like a runaway freight train down a mountain.

This means that no OTC derivative house can be allowed to go broke.

Three Guesses ... for Paulson's gut-wrenching sense of Urgency?

Anyone, Bueller, Bueller?

To say our Future has been Mortgaged away, is a serious understatement --
there's is not enough Wealth in the WHOLE WORLD, to cover the Paper Obligations that these CDS writers were allowed to create!!

How big is a Quadrillion anyways???

that's a Thousand Trillions!
1,000 x 1,000,000,000,000

that's a Million Billions!
1,000,000 x 1,000,000,000

Literally Astronomical !!!!!!!!!


the entire wealth of the  WHOLE WORLD, falls a bit short
of a Quadrillion!!!

Wealth of the entire planet:

GWP (gross world product):
$65.61 Trillion
(2007 est.)

AND the Wealth of the USA:

GDP (purchasing power parity):
$13.84 Trillion
(2007 est.)

If the entire World kicks in
we still fall WAY short of what all those CDS are worth


about $1078 Trillion Short!

Who's holding all that bad debt anyways
and why do WE have to pay it off?

Personally, I DON'T believe in Gambling!

and I think Short Selling (those betting against America)
are down right Un-Patriotic!

Such Speculators DESERVE whatever Losses they've Earned!

What's fair is fair!

If you bail out a Gambler Once --
you can Bet it WON'T be the Last Time!

Just say no ... is sometimes the best approach.

Originally posted to Digging up those Facts ... for over 8 years. on Tue Sep 23, 2008 at 06:41 PM PDT.

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Comment Preferences

  •  Tips (22+ / 0-)

    Tips for finally "getting some Truth"

    for our 700 Billion Dollar Investment!

    Hey Congress, have you seen Ferris Bueller anywhere??

    In a time of universal deceit, telling the truth becomes a revolutionary act -- George Orwell

    by jamess on Tue Sep 23, 2008 at 06:43:22 PM PDT

    •  CDS are akin to a put option - (4+ / 0-)
      Recommended by:
      NYFM, xaxado, Flaw, jamess

      the "value" can be very misleading.

      If I buy out-of-the-money $200 strike puts on Google for $1, the "value" is $1 today but $50 if GOOG falls to $150.  (50-1 pay ratio)

      Nevertheless, they exist in a shadow financial world and the call to have CDS traded on a regulated exchange will only expose sunlight on a dark corner of the financial abyss.

  •  rec this diary! (3+ / 0-)
    Recommended by:
    demnomore, jamess, beltane

    Oh and speaking of big give-aways, I say we ought to force the government to waive everyone's mortgage for three years, cancel ALL outstanding student loan debt, and provide FREE college to anyone who gets accepted into college for the next five years.  If a handout is good for the goose, it's good for the gander.

  •  So they've been gambling (8+ / 0-)

    with money that does not actually exist, and could not possibly exist, on this planet, and at this moment in time. And yet the American taxpayer is expected to cover the losses in their fantasy football game.

    Is this economics or quantum physics? I am confused.

    The weak in courage is strong in cunning-William Blake

    by beltane on Tue Sep 23, 2008 at 06:49:52 PM PDT

  •  Force congress to mull again this mulligen (4+ / 0-)
    Recommended by:
    OLinda, brentmack, jamess, beltane

    Dudehisattva... <div style="color: #0000a0;">"Generosity, Ethics, Patience, Effort, Concentration, and Wisdom"&l

    by Dood Abides on Tue Sep 23, 2008 at 06:50:03 PM PDT

  •  This diary makes me lightheaded (2+ / 0-)
    Recommended by:
    xaxado, jamess

    Tipped and Recc'd.

    The weak in courage is strong in cunning-William Blake

    by beltane on Tue Sep 23, 2008 at 06:55:01 PM PDT

  •  Thenekkidtruth, re: the Naked Truth :-) (5+ / 0-)
    Recommended by:
    OLinda, xaxado, jamess, beltane, qinkilla

    Here's why this is important.

    At this point in time, Americans DO NOT LIKE this fiscal disaster, but so far they think it's all related to bad mortgages. If it was, we'd be about done with the bad news, but that's not going to happen.

    This diarist has it right, and when the word gets out about the Ponzi-scheming pseudo-economy running in parallel with traditional financial institutions, they gonna be LIVID.

    The first step is to bust up this shadow economy and put the Kleptocracy who ran it in the Big House.  THAT's also why you don't wanna give the Kleptocrat-in-Chief, Hank Paulson, 700 Billion USD right now - he'll just use it to shore up the sham economy instead of the real one.

    This is the real crime. And it's radioactive enough such that it might just land Bush Manchild himself in jail.

    After Sep 2008, I have NO INTEREST in hearing about your "welfare queens".

    by thenekkidtruth on Tue Sep 23, 2008 at 06:55:18 PM PDT

  •  The dollar is worthless since (2+ / 0-)
    Recommended by:
    thenekkidtruth, jamess

    gold standards were abolished, It has been only petro dollars since( World needs dollars to buy oil with )That is why we are in Iraq  and soon Iran .. the only 2 countries that sold oil in euros.
    ooh and north Korea too but they have no oil.
    Wall street has been working a scam every 3-6 years like clockwork since the early 1900 's .. Some examples come to mind : the railroad , Tulips, Internet bubble, And finally housing..
    What is different in this cycle is the following:
    9/11   Gave the first American CEO president( yep that is the one)the absolute power of executive.. by having the democrats in the minority some of which were also indebted to wall street and mostly to Aipac to go along with MASSIVE LIQUIDITY PUMP and IRAQ WAR RESOLUTION and ALMOST 1% interest rates.
    on top of a worthless currency This is a gurabteed long term blow out bankruptcy waiting to happen.
    They started with a surplus too so this was easy from 2002 to now it has been only a kick the problem further down the road issue.
    You can not go bankrupt if you are too big to fail .. how ever you will eventually take every body else with ya!!
    I decided not to include any links  But I would be willing to prove each and every word if asked to.

    Real News Daily - !

    by egyinny on Tue Sep 23, 2008 at 06:57:28 PM PDT

  •  The CDS market is overstated. (3+ / 0-)
    Recommended by:
    Flaw, jamess, Jane Lew

    Say you buy a CDS from me on a $1mill principal, and you're paying me a 2.5% risk premium.  Things get ugly, so I turn around and buy a CDS from another guy for another 2.5%.  I've basically shifted the contract from me to him.  There are two $1mill contracts, but if the entity goes bankrupt, only $1mill gets transferred.

    So we have notional $2mill in contracts, but the actual cash at risk is half that.

    You should be ashamed! Stop blogging. Stop blogging right now! - Ivy Frye, assistant to Gov. Palin

    by burrow owl on Tue Sep 23, 2008 at 06:57:48 PM PDT

  •  naked shorting (1+ / 0-)
    Recommended by:

    The illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short [Bet the Price will go Down]. But due to various loopholes in the rules and discrepancies between paper and electronic trading systems, naked shorting continues to happen.

    So let me get this straight -- in order to trade a stock, you must first prove that it actually exists?  It's funny that serious people take this stuff seriously.

    Nobody said it would be easy.

    by cardinal on Tue Sep 23, 2008 at 06:58:18 PM PDT

    •  to legally short a stock (1+ / 0-)
      Recommended by:

      you must first take ownership of the shares
      before you sell them

      (ie you "borrow the shares" from your broker,
      or put up collateral, saying your "good for the shares" -- assuming the Trade goes against you)

      Naked Shorter, skip such niceties!

      In Volatile Markets, they literally are trading MORE Shares downward,
      than ARE ACTUALLY AVAILABLE to be traded.
      Certainly trading Shares, they don't even own!

      Thus the illegality.

      In a time of universal deceit, telling the truth becomes a revolutionary act -- George Orwell

      by jamess on Tue Sep 23, 2008 at 07:03:06 PM PDT

      [ Parent ]

    •  Great illustration! (1+ / 0-)
      Recommended by:


      It can only go one direction from here --

      New World Order?

      Global Economy?


      How about going back to the Gold Standard,
      and finally working towards Energy Independence!

      Global markets
      have made my opportunities
      any brighter!

      In a time of universal deceit, telling the truth becomes a revolutionary act -- George Orwell

      by jamess on Tue Sep 23, 2008 at 07:17:07 PM PDT

      [ Parent ]

      •  Global Market (0+ / 0-)

        Global markets
        have NOT made my opportunities
        any brighter!  


        Why do we sell so many Securities (CDS?)
        to China, and Saudi Arabia again?

        In a time of universal deceit, telling the truth becomes a revolutionary act -- George Orwell

        by jamess on Tue Sep 23, 2008 at 07:18:56 PM PDT

        [ Parent ]

  •  Put the money in a Public Works programs (2+ / 0-)
    Recommended by:
    demnomore, jamess

    Screw the bailout, let Wall Street die. We can't possibly bail it out so start preparing for the inevitable melt down instead. Public Works programs to get people working again, increase Social Security, tax breaks for keeping jobs in America, The Party is over

    •  you can bet (0+ / 0-)

      Social Security,

      will the next thing on the chopping block

      right after they tell America

      to Fuhget about it -- about Universal Health Care!

      Sorry we can't afford -- to help regular People --

      Only the top 1% are "worthy of entitlements"

      In a time of universal deceit, telling the truth becomes a revolutionary act -- George Orwell

      by jamess on Tue Sep 23, 2008 at 07:21:48 PM PDT

      [ Parent ]

  •  Answer's Bailout Question (5+ / 0-)
    Recommended by:
    xaxado, oscarsmom, drbloodaxe, jamess, soithoni

    Support or Oppose "mortgage" BailoutSupport or Oppose "mortgage" Bailout

    I went to and they have a question
    and want to know your opinion
    Do you support the 700 billion bailout
    Do you Oppose the 700 billion bailout

    Then they ask you to comment on your choice
    it gets sent to bush paulson and your get to work

    I oppose the proposed bailout plan because

    it will only benefit the perpetrators of this crisis.
    Paulson today basically debunked the notion that we are facing a financial armageddon when it was reported that plans had been circulating since early this year. He never advised Congress of this. He and the rest of the perpetrators continued to deny major problems until last week stating "our economy is fundamentally sound". Now...
    We are being held at gunpoint, and threatened with "grave danger" unless WE pay the Ransom...
    Go ahead, SHOOT ME

    to Domestic Financial Terrorism

    by the way Fannie and Freddie had VERY LITTLE to do with this CRISIS. Their problems were a result of the rampant fraud thoroughout this so called Free Market System*

    *(House of Cards, Ponzi, Fraud, Scam)

    Bush/Cheney04 Because it takes 8 years to Destroy the Country Download GeckosAgainstBS song

    by demnomore on Tue Sep 23, 2008 at 07:01:20 PM PDT

  •  It's fake money. (3+ / 0-)
    Recommended by:
    xaxado, oscarsmom, jamess

    Use a few extra tubes of lipstick on that pig and it's still fake money that never existed.  Why anyone besides the companies that 'promised' to pay off those bets should even try to bail them out is beyond me.  You placed a bet you can't cover?  Fine, you get beaten up, maybe kneecapped.  It's your problem.

    But there is no quadrillion dollars to pay off your phony bets, so all you have are scratch off tickets to a lottery run by a nigerian prince.  Tough luck.

    And I don't buy the crapola about it driving main street under.  Chinese holding a ton of CDS's?  Tough luck on them too.  Maybe we could hand over the guys who defrauded them.  I'm sure they could come up with some appropriate penalties...

    The very fact that these so called securites were unregulated tells you that the US isn't on the hook for the frauds perpetrated by private companies UNLESS Paulson, Bernanke and Bush are ALLOWED to put us on the hook by Congress.

    Got a problem with my posts? Quit reading them. They're usually opinions, and I don't come here to get in arguments.

    by drbloodaxe on Tue Sep 23, 2008 at 07:45:37 PM PDT

  •  Your diary should be rescued! (3+ / 0-)
    Recommended by:
    thenekkidtruth, xaxado, jamess

    It deserves more attention than it got.  Thanks for making learning about Credit Default Swaps fun.

    Never give up! Never surrender!

    by oscarsmom on Tue Sep 23, 2008 at 08:00:38 PM PDT

  •  And the ultimate GOP goal is to kill New Deal (2+ / 0-)
    Recommended by:
    thenekkidtruth, jamess

    $$$ moving UP and to the RIGHT, with nothing left for defending us, "We the People" against the corporations, against the wealthy.

    Nothing left for social spending.

    Media Reform Action Link

    by LNK on Tue Sep 23, 2008 at 08:10:52 PM PDT

  •  Mania (1+ / 0-)
    Recommended by:

    Well said, jamess, good on you!  I've been saying the same thing in humbler form around here for days, with comments such as:

    Any plan that fails to regulate derivatives trading and hedge funds simply fails.  Barney Frank and Chris Dodd are a distraction from the root causes of this implosion, what is often called shadow banking.  

    Nouriel Roubini correctly points to the unraveling of the shadow banking system as the underlying disease here. This malignancy is inoperable, incurable, and fatal. Our financial system is a dead man walking, but not for long, no matter what we do.

    History will look back on this as the Derivatives Mania.  Tulips, at least, would be more pleasant.

    The Shock Doctrine by Naomi Klein -- best book ever, I nominate for a Nobel Prize!

    by xaxado on Tue Sep 23, 2008 at 08:42:50 PM PDT

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