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Cds Fraud Will Make Madoff Look "small-time"

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Harry Markopolos: CDS Fraud Will Make Madoff Look "Small-Time"

Memo to regulators: be forewarned about frauds in the credit-default swap market. They'll make Bernie Madoff's $65 billion fraud "look like small-time."

That's what Harry Markopolos -- Madoff's whistleblower ignored by federal investigators -- is saying, anyway.

New York Post: [Markopolos] says there are evildoers out there who will make the Ponzi scum "look like small-time." Markopolos gave a speech to 400 of the faithful at the Greek Orthodox Church in Southampton and predicted major scandals will soon be revealed about the unregulated, $600 trillion, credit-default swap market. "To put it in simple terms, it is like buying fire insurance policies from five different insurance companies on your neighbor's house and then burning down the house," he said.

It's not clear if there are frauds that he knows of, specifically, that he's not disclosing publicly, or if it's just his how the market works -- in which case, he's basically just parroting what a lot of people who hate "naked" CDS have been saying. Either way, we suggest Mary Schapiro or the CFTC pay him a call and get a clarification.

Yep, he's right. It's all been a huge con, and eventually the pension and public funds who leveraged themselves so heavily in these atrocities will find the cupboards are bare.

There is no recourse either. When some magic suits in Wall St/LSE managed to split a zero into many bits and sell them all on. "there's a sucker born every minute" springs to mind.

http://en.wikipedia.org/wiki/Credit_default_swap

Financial Weapons of Mass Destruction

Warren Buffet calls credit derivatives “financial weapons of mass destruction.†When his company, Berkshire-Hathaway, Inc., took over an insurance company in 2002, it took him four years to unwind its portfolio of credit derivatives — at a cost of $400 million. Buffet didn’t entirely follow his own advice, however, because in the first quarter this year Berkshire-Hathaway took another $500 million loss on credit derivatives.

Why worry about credit derivatives? One reason is that the “notional value†of the most important credit derivatives, credit default swaps, or CDS, is now $62 trillion. That’s trillion, with a “‘T,†and it is more than the whole world’s gross domestic product. Numbers that big automatically make people nervous, especially when they see the canniest investors :Plike Buffet taking losses.

CDS are the fastest-growing financial instrument of all time, because they fill a real need. Stock markets have long had efficient methods of re-balancing risk. For example, if you have a large stock position, and are worried that it will fall, you can buy options that will limit your possible losses, without the expense of actually selling the shares.

But bond markets, other than Treasuries, are primitive compared to stocks. There are no options markets for corporate bonds. So if you were worried about your holdings, your only recourse was to sell them. Markets in mortgages and bank loans are even less developed.

Enter CDS, often called “credit insurance.†Suppose a bank, or pension fund, is worried about its exposure on a portfolio of bonds. It can enter into a CDS with another investor to shift the risk of defaults. The bond owner makes a regular stream of payments to the protection seller over the life of the swap; in consideration for the payments, the protection seller promises to make good the losses to the bond owner if the bonds default.

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So what is the compressed value, or real, or whatever we both owe each other from CDS.

It doesn't really matter. The real value is close to nil, as it is impossible for each party to be paid out in this insane creation should the terms ever be met for redemption. It does however carry a nominal value, if worthless in real terms, which can be used as leverage, and that is a big part of the reason why markets crashed.

What these have done though, is create a financial vehicle in which sharp traders have accrued massive financial gain through fees.

Remember, that in every trade, there is a loss....or skim. After so enough trades, these derivatives become near worthless (if they ever were) and the only people holding anything of value would be the middle men.

Besides, if the original party upon which the 'insurance' was gambled upon goes belly up, well, who is going to pay if you've got no money and can't weigh it against anything?

Of course, at the end of the day, if say....your pension fund, sanctioned by the state, bet heavily on these and lost, well, you know. Bailouts for the betterment of the state and voters yadda yadda.

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So what is the compressed value, or real, or whatever we both owe each other from CDS.

Notional is already down to $400trio ish, FYI.

And that was done by offsetting contracts where, like I said the other day, gross exposures were given stupidly large numbers, despite tiny net exposures. I.e. I owe Goldman, Goldman owes RBS, RBS owes Barclays, Barclays owes UBS, UBS owes some Hedge Fund which in turn owes me. Net exposure = zero. Gross exposure = massive.

People who don't understand this stuff do really need to get a grip on the difference between net and gross exposure before chucking the toys out of the pram because the only thing that matters with gross exposure is your credit exposure to each participant, and that will also soon be removed when CDS go on exchange.

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All this stuff about zero sum CDSs is on the assumption that every who owes can pay.

AIG seems to be on the potential losing side of a lot of CDS as are pention funds and they don't have the fund to pay out.

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All this stuff about zero sum CDSs is on the assumption that every who owes can pay.

AIG seems to be on the potential losing side of a lot of CDS as are pention funds and they don't have the fund to pay out.

+1

Everything is zero sum (or near enough) when you net it all off, according to the contracts written.

Sub prime mortgages are zero sum.

So what's all the fuss been about?

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All this stuff about zero sum CDSs is on the assumption that every who owes can pay.

AIG seems to be on the potential losing side of a lot of CDS as are pention funds and they don't have the fund to pay out.

Anoos

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Harry Markopolos: CDS Fraud Will Make Madoff Look "Small-Time"

Yep, he's right. It's all been a huge con, and eventually the pension and public funds who leveraged themselves so heavily in these atrocities will find the cupboards are bare.

There is no recourse either. When some magic suits in Wall St/LSE managed to split a zero into many bits and sell them all on. "there's a sucker born every minute" springs to mind.

http://en.wikipedia.org/wiki/Credit_default_swap

Financial Weapons of Mass Destruction

Nosh

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Notional is already down to $400trio ish, FYI.

And that was done by offsetting contracts where, like I said the other day, gross exposures were given stupidly large numbers, despite tiny net exposures. I.e. I owe Goldman, Goldman owes RBS, RBS owes Barclays, Barclays owes UBS, UBS owes some Hedge Fund which in turn owes me. Net exposure = zero. Gross exposure = massive.

People who don't understand this stuff do really need to get a grip on the difference between net and gross exposure before chucking the toys out of the pram because the only thing that matters with gross exposure is your credit exposure to each participant, and that will also soon be removed when CDS go on exchange.

balance off...all fine and dandy until an entity which thinks an insurance IS an insurance and actually takes a risk on a bet, finds out its nothing of the kind...somebody like say...I dunno, lets think for a moment......how about ..AIG....needed US government to pay the CDS liabilities otherwise the entire banking system was going to collapse.

hmmm....

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balance off...all fine and dandy until an entity which thinks an insurance IS an insurance and actually takes a risk on a bet, finds out its nothing of the kind...somebody like say...I dunno, lets think for a moment......how about ..AIG....needed US government to pay the CDS liabilities otherwise the entire banking system was going to collapse.

hmmm....

HAVE WE DISCUSSED THIS AROUND 400000 TIMES ALREADY?

Anyway, what are views on Thomson?

http://www.reuters.com/article/rbssConsume...LC7348820090812

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OP, it may be worth requesting that this thread is deleted.

Noel, it may be worth stopping your spamming too :lol:

If you don't agree, then disagree in a way we can follow and be educated (or at least entertained).

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HAVE WE DISCUSSED THIS AROUND 400000 TIMES ALREADY?

Anyway, what are views on Thomson?

http://www.reuters.com/article/rbssConsume...LC7348820090812

I beleive we have, and STILL the balancing out case has still to be proved in reality.....and maybe there are 700bn reasons to continue to doubt.

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Noel, it may be worth stopping your spamming too :lol:

If you don't agree, then disagree in a way we can follow and be educated (or at least entertained).

I did this, but got bored after 12 months of going over the same thing again and again. And again.

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Notional is already down to $400trio ish, FYI.

And that was done by offsetting contracts where, like I said the other day, gross exposures were given stupidly large numbers, despite tiny net exposures. I.e. I owe Goldman, Goldman owes RBS, RBS owes Barclays, Barclays owes UBS, UBS owes some Hedge Fund which in turn owes me. Net exposure = zero. Gross exposure = massive.

Sounds a bit like an LMX spiral or an MBS market and look what happened to them.

Anyways, the point remains about treating CDSs as insurance on other people's risks.

As the market is unregulated its prone to fraud.

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I did this, but got bored after 12 months of going over the same thing again and again. And again.

I wouldn't complain if I were you. Wait till you've tried convincing a religious fundamentalist that Evolution is correct, or a global warming denier that basic physics is correct..

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