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In reply to the discussion: STOCK MARKET WATCH -- Thursday, 19 January 2012 [View all]Ghost Dog
(16,881 posts)59. Riiight.
Eg. (Just substitute 'sovereign' for 'corporate' bond where appropriate):
... CDSs are what crippled insurance giant AIG, and I think you will hear about this issue a lot more in the next few months
and it could get A LOT worse...
...However, with a CDS, you can buy insurance even if you dont own the bond; this is called speculation. When you buy a CDS w/o owning the underlying bond, you are essentially betting that the corporation will go bankrupt. This is like buying car insurance for your friends shiny new Ferrari, hoping to collect in the event that he crashes. Some hedge funds even allegedly speculate in CDS while sabotaging their underlying corporate stocks to increase the chances of bankruptcy. This is the equivalent of cutting the brakes on your friends Ferrari.
The Problem with CDS
Uncontrolled greed and lack of regulation has allowed banks and other financial institutions to insure more corporate bonds than they can afford. There is no authority in the CDS market that ensures that people who are writing insurance can actually cover it in the event of a disaster. Another problem is that these policies can be bought, sold, and traded like stocks. Even if a sound, well capitalized institute originated the CDS, they could have sold the contract to a non-so-sound company that cant cover the cost of default. This is truly a ticking time bomb.
Chain Reaction
If a behemoth nationwide bank fails, company X, which has written far too many CDS contracts, will have to pay billions or trillions to cover the insurance. There is no company on the planet that has that much money, so company X would have to declare bankruptcy too. Whoever wrote CDSs for company X would have to cough up insurance money (that it doesnt have), setting off a domino of bankruptcies...
/... http://www.bankaholic.com/derivatives-credit-default-swaps/
...However, with a CDS, you can buy insurance even if you dont own the bond; this is called speculation. When you buy a CDS w/o owning the underlying bond, you are essentially betting that the corporation will go bankrupt. This is like buying car insurance for your friends shiny new Ferrari, hoping to collect in the event that he crashes. Some hedge funds even allegedly speculate in CDS while sabotaging their underlying corporate stocks to increase the chances of bankruptcy. This is the equivalent of cutting the brakes on your friends Ferrari.
The Problem with CDS
Uncontrolled greed and lack of regulation has allowed banks and other financial institutions to insure more corporate bonds than they can afford. There is no authority in the CDS market that ensures that people who are writing insurance can actually cover it in the event of a disaster. Another problem is that these policies can be bought, sold, and traded like stocks. Even if a sound, well capitalized institute originated the CDS, they could have sold the contract to a non-so-sound company that cant cover the cost of default. This is truly a ticking time bomb.
Chain Reaction
If a behemoth nationwide bank fails, company X, which has written far too many CDS contracts, will have to pay billions or trillions to cover the insurance. There is no company on the planet that has that much money, so company X would have to declare bankruptcy too. Whoever wrote CDSs for company X would have to cough up insurance money (that it doesnt have), setting off a domino of bankruptcies...
/... http://www.bankaholic.com/derivatives-credit-default-swaps/
But also:
... While some point out CDS triggers are very much a secondary consideration when restructuring debt, market consensus holds the authorities will look to avoid such a scenario with respect to Greek bonds. Although a Greek trigger is unlikely to have systemic implications net notional of CDS referencing Greece is currently US$5.6bn according to the Depository Trust and Clearing Corporation compared to around 223bn of euro-denominated bonds outstanding (and US$394bn of Greek debt in total) some fear it could spread contagion to other peripheral sovereigns...
/... http://www.ifre.com/derivatives-avoiding-greek-credit-event-questions-cds-value/632980.article
/... http://www.ifre.com/derivatives-avoiding-greek-credit-event-questions-cds-value/632980.article
I've a feeling that sort of idea of what's supposed to be merely 'notional' is about to become... notional, as this particular leveraged and rehypothecated toxic derivative chain threatens to unravel.
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$10 TRILLION Liquidity Injection Coming? Credit Suisse Hunkers Down Ahead Of The European Endgame
Demeter
Jan 2012
#7
Speaking of the skunk, I just meandered over to Automatic Earth and found this.
Fuddnik
Jan 2012
#18
Yeah. What would be the corresponding statistics for the States? The Skunk, you see,
Ghost Dog
Jan 2012
#19
Well, ZH has a tendency to go way over the top, on occasion. The 'soundbite' is based on
Ghost Dog
Jan 2012
#20
I don't really "understand" any of it, Tansy - but I don't think it matters
bread_and_roses
Jan 2012
#62
Not as far back as our reptile brains. Just a hundred and fifty years of Western social progress,
Ghost Dog
Jan 2012
#65
The A-List: Jeffrey Sachs - Self-interest, without morals, leads to capitalism’s self-destruction
Demeter
Jan 2012
#37
Obama's "tax-policy", the new puppet-in-waiting and the collapsed UBS business model.
Ghost Dog
Jan 2012
#87