Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
50 trillion in credit default swaps
Old 10-26-2008, 08:02 PM   #1
Thinks s/he gets paid by the post
 
Join Date: Oct 2005
Posts: 4,898
50 trillion in credit default swaps

I'm beginning to understand how these CDSs are affecting the economy. Apparently, the total amount is about 50 trillion. Since they were unregulated and the transactions nontransparent, no one knows how many are left out there, waiting to be dumped on some other financial institution.

I'd appreciate some smart people explaining how this might play out. What other financial institutions might be at risk here?
__________________

__________________
Zoocat is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 10-26-2008, 09:44 PM   #2
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
First, understand this. CDS contracts almost never get closed, instead they get offset. So if my firm writes a CDS on $10M of Merrill Lynch debt and later decide I don't want the exposure, I will usually just buy an offsetting contract for $10M

So, the notional amount of my exposure would be $20m, but the amount at risk would be $0.

Don't get me wrong, the CDS situation is screwy, but there are a lot of people trying to cause alarm by using the "t" word when that doesn't give you a good idea of the amount actually at risk.

These things need to be on an exchange, the CME group at Citadel are working on that now.
__________________

__________________
saluki9 is offline   Reply With Quote
Old 10-26-2008, 10:04 PM   #3
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,322
Quote:
Originally Posted by saluki9 View Post
So, the notional amount of my exposure would be $20m, but the amount at risk would be $0.
In theory you are correct. However, your offsetting trade may have been put on with a different broker, so you may have counter-party risk on both transactions, thus potentially disrupting your hedge. This is the reason, as you say, these things should trade on a centralized exchange, where the offsetting trades truly cancel out.
__________________
FIRE'd@51 is offline   Reply With Quote
Old 10-27-2008, 04:21 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2007
Posts: 5,072
IMO - There things should only be able to be written against the actual asset... no creation of a gamble against bonds that do not exist.

For example: If GE has $100B in bonds... that is the extent of CDS that can be written in total by all underwriters. If speculators want in... they have to buy one of the max $100B GE CDS that is on the market. The amount should be capped. Anything else is merely creating inordinate risk in the market (and for companies).

But that may not be practical... so companies that underwrite those things should have to hold reserves of about 33% of what they write with no more than 10% written for any other entity, and limited in business sectors, countries, etc....

Writing a CDS that has no underlying asset and selling it to a speculators is just printing money an loading up on liabilities... hoping the bill never comes due.
__________________
chinaco is offline   Reply With Quote
Old 10-27-2008, 08:24 AM   #5
Thinks s/he gets paid by the post
 
Join Date: Aug 2006
Posts: 1,361
Does anyone know where this $50 trillion number came from? I see it a lot but have never heard the original source.

Seems like a very hard thing to estimate the amount for, given that there isn't any disclosure for these things.

Did someone just make this number up, and since its been printed a few times it is now "fact"?


Quote:
Originally Posted by Oldbabe View Post
I'm beginning to understand how these CDSs are affecting the economy. Apparently, the total amount is about 50 trillion. Since they were unregulated and the transactions nontransparent, no one knows how many are left out there, waiting to be dumped on some other financial institution.

I'd appreciate some smart people explaining how this might play out. What other financial institutions might be at risk here?
__________________
Hamlet is offline   Reply With Quote
Old 10-27-2008, 08:46 AM   #6
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Quote:
Originally Posted by FIRE'd@51 View Post
In theory you are correct. However, your offsetting trade may have been put on with a different broker, so you may have counter-party risk on both transactions, thus potentially disrupting your hedge. This is the reason, as you say, these things should trade on a centralized exchange, where the offsetting trades truly cancel out.
Yeah I know, I was trying to make my example as simple as possible. With any swap you always have to factor in counter party risk.
__________________

__________________
saluki9 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Lehman -- Credit Default Swaps Covering returnofbabyape FIRE and Money 1 10-14-2008 03:00 AM
Credit Default Swaps boont FIRE and Money 15 09-21-2008 07:49 PM
Who sells credit default swaps? ExHermit FIRE and Money 7 01-26-2008 07:30 AM
Universal Default Credit Card Rates.....Again!! FinanceDude FIRE and Money 26 10-13-2006 07:15 PM

 

 
All times are GMT -6. The time now is 06:16 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.