Friday, Feb 20, 2009
$28 trillion credit-default swap market
Bloomberg: U.S., Europe May Jointly Regulate Credit Derivatives
Feb. 19 (Bloomberg) -- U.S., U.K., and European regulators are in talks to jointly regulate the $28 trillion credit-default swap market, the Federal Reserve said today.
Posted by gardeniadotnet @ 12:03 PM (562 views) Add Comment
7 Comments
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1. gardeniadotnet said...
We have no trust in the markets today. None.
I cannot value anything in this market. Absolutely nothing. And this sort of lie is part of the reason:
Feb. 19 (Bloomberg) -- U.S., U.K., and European regulators are in talks to jointly regulate the $28 trillion credit-default swap market, the Federal Reserve said today.
Regulators including the Fed, U.K.’s Financial Services Authority, German Federal Financial Services Authority and European Central Bank met today to discuss a possible information sharing agreement, the Fed said in a statement on its Web site. The goal would be to apply consistent standards to the market and provide support across jurisdictions, the Fed said. "
This was supposed to be done last year, remember? By the end of the year we were supposed to have an implementation plan to get this done with the infrastructure in build-out going on right now.
Instead we have The Fed lying again about the issue.
Why?
Because Bernanke knows - these contracts cannot be covered as the people who wrote them have ZERO, or close to it, in capital!
How do we know? Because AIG still hasn't been forced to disgorge and close their CDS book, despite over $100 billion in direct support. Why not BEN? Is it because AIG's liability under those contracts might be several hundred billion more, and if you net them and then close the book you'd have to make good on it or default them, and the guys on the other side are your banking buddies?
Karl Denninger
Thursday, February 19th, 2009
2. jackas said...
We will all end up having sold these things through government bailouts.
3. troy said...
this may be of some use here
~~~~
Derivatives for Dummies
Katherine Harris
Dandelion Salad
Wed, 18 Feb 2009 22:35 UTC
Recent attempts by corporate media to explain the nature of our economic meltdown have left me ready to bite the ears off mice. They've been superficial, profoundly misleading and, above all, apologias for the likes of Paulson, Bernanke and Geithner. So, having spent every spare moment over the past three years studying the debacle that many saw brewing, here's the simplest explanation I've come up with:
Imagine being able to insure a car that you don't own or use. Imagine it's the car your neighbors will let their teenage son drive, when he gets his license in a few weeks - and you know the kid is a reckless brat.
Now imagine that, by using financial derivatives called swaps, you can purchase as many insurance policies on this car as you can afford to pay premiums on.
When that car is eventually trashed and scrapped, you - and any friends you clued in on the deal - might collect millions, even billions, of dollars. By contrast, your neighbors, who bought real insurance on a real vehicle, get only its Blue Book value (and, one hopes, a chastened child).
This explains the primary problem with swaps. Anybody can bet on anything, so the nominal value of the bets far exceeds the actual worth of any property involved.
Still worse, no tangible or financial asset has to be in the picture
http://www.sott.net/articles/show/176697-Derivatives-for-Dummies
http://dandelionsalad.wordpress.com/2009/02/18/exclusive-derivatives-for-dummies-by-the-other-katherine-ha
4. James said...
But Troy, what's the problem with that? Millions are staked on horse races with prizes of about 10 grand... as long as you've got decent counterparties, what's the problem?
5. gardeniadotnet said...
@3 I like that analogy, malct's cousin. Thanks.
Just been reading another summary of where we are and how we got here. An extract follows...
What was new was the securitization of subprime loans made possible by a contraption called the collateralized debt obligation (CDO) "invented' in the mid-'90s and unleashed sometime around 2003.
But even these devices didn't go far enough for Wall Street. The investment houses found ever more clever and exotic ways to leverage money to increase their returns. The use of credit derivatives including credit default swaps exploded, dwarfing the underlying debt upon which they were based. The International Swaps and Derivatives Association (yes, there really is such a group) estimated the value of these devices at $62 trillion.
Credit default swaps and collateralized debt obligations were supposed to insure against risk. Instead, they became "weapons of mass destruction," in the words of Warren Buffett. Speculation went through the roof. The Bank of International Settlements estimated the notional value - that is the value of the underlying debt - of credit default swaps alone was $45 trillion.
But the fun didn't stop there. Because the issuance of derivatives is virtually unregulated (no pesky reserve requirements) extreme leveraging took notional values to several hundred times their capital. Indeed, the notional value of all derivatives reached almost $600 trillion, exponentially higher than the value of all economic activity on the planet.
Frank Schiavone
Posted: 02/18/2009 06:19:33 PM PST
sbsun.com
6. 51ck-6-51x said...
troy -
Your analogy is good (I always like to think of fire insurance on a house, when enough of the neighbours have bets on, someone will take some petrol & a match down there...)
When you say, "Imagine being able to insure a car that you don't own or use. Imagine it's the car your neighbours will let their teenage son drive, when he gets his license in a few weeks - and you know the kid is a reckless brat." though, one probably could - one could try Ladbrokes, and if they don't want to give you odds and take the other side, there may well be a regular punter in there who will ;p
7. P. Riddy said...
So. Instead of banning fraud, we get a transnational bureaucracy to regulate the band of criminals who caused this. Is the bureaucracy really a racket, to stop new entrants to the ponzi schemes. To monopolize white collar crime, aka derivatives.