I've been hearing about the 35 trillion in derivatives out there and how this bill won't dent the trillions needed in derivatives. but if they save the credit markets won't those derivatives debt be saved also? aren't they protecting the mortgages that the derivatives are based on so wouldn't the value of the swaps and what these companies owe drop?
I have heard the number is as high as $62 trillion, even higher. I don't think anybody know for sure as these are OTC. Now my question since I use simple logic, how does $700 billion address trillions in dollars in CDS?
My understanding is the bulk of this 700 Billion will go to Federalize shitty, illiquid assets in exchange for Treasury Paper. This will take more than 700 Billion in losses off the books of various banks and investment guys. This means they won't go bankrupt and trigger CDS payout on their insured debt. The affect on Credit Markets is secondary, and a downstream/indirect effect of the bailout. Now, banks are very reluctant and afraid to lend overnight because no one knows who might go under next (with overnight loans, they can't afford to lose). Hence, nobody lends and credit markets seize. When the FED Nationalizes, solvency of American banks is no longer in question and money markets/overnight lending eases. Could be wrong, but thats my take so far.
If there is CDS on mortgage debt (CDO), then yea, FED takes ownership and absorbs the loss - even if CDO value goes to zero. This is what they're doing. FED/US Taxpayer is going to eat the loss to prevent CDS trigger in the Private Market. Would tank the system, as they say. Well, theres other ways to get the job done. Like Nullify every CDS contract in existence. Simply absolve responsibility of insurers to honor in the event of default. And then its not a domino scenario.
Cause its 65 Trillion in Option Exposure. Wallstreet sold premium on 65 Trillion in short options, betting the entire Market would not go insolvent. Of course, the premium they collected - like any option - is far less than the actual exposure the option writer has if that option becomes "in the money". That 65 Trillion is only what they'd have to pay if everyone went bankrupt. Its total market exposure. Not actual wealth collected. The problem is that theres 10 Times CDS outstanding on every dollar of Corporate debt out there. So for Lehman, their 400 Billion in Corporate debt is actually 4 Trillion in CDS exposure for insurers. When a couple Big Corps go under, and derivitive traders can't net or hedge their positions, precarious banks would have to pay out, this puts them in bankruptcy. Then its another round with each round compounding on itself. 2 go under. Then 5. Then 20. Then 100. Then the whole thing crashes over night.
could you imagine the massive lawsuits the gov't would receive if they did that thou. so the govt plans to eat the cds losses? So why are so many people saying the govt is gonna profit from this bailout?
My understand is that the govt. would hold the bad paper on mortgages and sell them for a profit, hopefully, when there is a cyclical change in RE. What concerns me most are 2 things. 1. We are supposed to trust leaders whom either didn't know the magnitude of the problem just a few weeks ago or lied to us. Either way they are flawed and should not be trusted. 2. No one has the details of this bailout, you just hear it's being worked out. Ok, fine then when you get the details propose it to the American ppl. and give them time to make an informed decision. That speech last night by the VI all about fear and control to get ppl. to act quick like the Patriot Act, that's what makes me suspicious of this plan. Lastly, anyone that has been trading for any amount of time knows that no one knows what will happen it's all speculation. I have seen as many against the bailout for logical reasons as those for.
The Government has to eat the losses. Somebody has too. Those losses are real and don't change when ownership does. People will still go into arrears, default and foreclose their mortgage regardless of who owns the other side of that mortgage. In the case of Government, it can take those losses and transfer them to the taxpayer via inflation without setting off a chain reaction of CDS default that, assuming those contracts are left intact, could destroy the market. Wallstreet is the Pimp. And Politicians are its Whore. The Tax Payer is the John who gets fucked. In this colorful analogy, the Pimp and Whore need to convince the John (us) why we should let them fuck us for Money. Its just a Game, bro. Pure hype to propagandize a bailout for the people who lobby and finance Washington Whores.
but all the mortgages wont go into default which won't hold the the govt responsible for the whole 65 trillion in derivatives out there.
Yea, thats the point. The point is not for the FED to honor Trillions in CDS insurance for those who bought it. The point is to bail out these organizations and assets so that CDS will not trigger. And therefore, that 65 Trillion in insured debt does NOT become owing. Its a way of taking risk and losses out of the market and nationalizing them backed by the printing press to maintain their value.