30+ trillion CDS bubble still looming

Discussion in 'Economics' started by seauouch, Nov 30, 2008.

  1. seauouch


    must read article..


    The government needs to step in & declare all these CDS contracts that were sold as pure speculation with no underlying asset backing invalid. The 300 billion backstop on losses the govt gave to Citi is in essence like the government buying 300 billion losing lottery tickets.
  2. It needs to be done on a global base.

    If they don't then they want to destroy the global economy it's as simple as that.
  3. seauouch


    some of the more interesting excerpts...

    "As part of the presentation (Page 17-21), IRA co-founder Chris Whalen argued the case made by a reader of The IRA a week before (see "New Hope for Financial Economics: Interview with Bill Janeway,") that until we rid the markets of CDS, there will be no restoring investor confidence in financial institutions. Here is how we presented the situation to about 200 finance and risk professionals in the auditorium of JPM last week. Of note, nobody in the audience argued.

    1) Start with the $50 trillion or so in extant CDS.

    2) Assume that as default rates for all types of collateral rise over next 24-36 months, 40% of the $50 trillion in CDS goes into the money. That is $20 trillion gross notional of CDS which must be funded.

    3) Now assume a 25% recovery rate against that portion of all CDS that goes into the money.

    4) That leaves you with a $15 trillion net amount that must be paid by providers of protection in CDS. And remember, a 40% in the money assumption for CDS is VERY conservative. The rise in loss rates for all type of collateral over the next 24 months could easily make the portion of CDS in the money grow to more like 60-70%. That is $40 plus trillion in notional payments vs. a recovery rate in single digits.

    Q: Does anybody really believe that the global central banks and the politicians that stand behind them are going to provide the liquidity to fund $15 trillion or more in CDS payouts? Remember, only a small portion of these positions are actually hedging exposure in the form of the underlying securities. The rest are speculative, in some cases 10, 20 of 30 times the underlying basis. Yet the position taken by Treasury Secretary Paulson and implemented by Tim Geithner (and the Fed Board in Washington, to be fair) is that these leveraged wagers should be paid in full."
  4. The issue sounds about right. But I'd like to see his source for 50 trillion.
  5. I love it. My neighbors can all buy fire insurance on their houses. Their insurance company can sell off the risk and then the insurance company doesn't care if the houses burn!! If I can find a way to short the risk then it makes sense for me to burn all the houses!!

    Talk about SHTF!! And Obama wants to capitalize on the crisis to "really throw long and deep" in the words of one of his advisers... We are so screwed that I don't care any more. I can think of business plans that will work great in the SHTF world but with Obama drooling to nationalize all the successful stuff why even bother with it all....
  6. There are too many assumptions.

    Why not give all players 30 days to register their CDS and get them onto the table.

    Then they can be strung together.
    Who is to say that leaving timing aside, that the attrition rate will not approach 100%

    This being the case then just fire off the CDS simultaneously and deal with the balance.
    Better still just cancel them and treat the out of pocket winners with the sheer contempt normally reserved for the individual taxpayer.

  7. Well I looked it up. LEH had 365 billion in CDS which was netted off to like 6 bil.

    If you extrapolate that out for 50 trillion it doesn't seem all that daunting - somewhere around one trillion in losses. BWTFDIK I'm just a trader.
  8. seauouch


    Along those lines I read an interesting article in the New Yorker ( sorry no link ) about hedge funds taking huge naked short positions then buying CDS's in the companies they were shorting. It only takes a relatively small purchase in CDS's to drive up the premium on these CDS's. The market sees these CDSs premiums going up & reads it as an ominious sign of impending default causing the stock to plummet.

    Once again the SEC is alseep at the switch.
  9. Do you get the feeling that we are all being herded like lab rats.

  10. All "wealth" that is denominated in fiat money is illusionary and must eventually be erased in a Kondradieff wave. The only thing which changes over the ages is the biological-like evolutionary nature of the methods of destruction. Rarity alone survives as a store of wealth.
    #10     Nov 30, 2008