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Derivatives... $500T?
- Thread starter gnome
- Start date
Quote from nazzdack:
Even among that 5%, there are long AND short positions that can be offset to ease the "stress".
Wheww [wiping brow].... I thought for a moment that I might have something to be concerned about.
Any concern about those who "believe" they are covered but will be unable to collect due to insolvency of some parties?
Seems Wallstreet leveraged Credit Default Swaps into a speculative instrument.
Credit Default Swaps represent Corporate bond insurance sold by third-parties.
CDS is akin to AMBAC for mortgages. The ratio for insured bonds to actual outstanding is estimated* at 10:1. Not 1:1. Specs presumably hold the other 90%.
When an institution goes under, their third-party insured debt could - under those assumptions - be equivalent to 10X outstanding of actual debt.
For instance, Bear had, if memory serves, 127 Billion outstanding long term debt (bonds and loans). Assuming 10 to 1 = 1.27 Trillion third party CDS sellers are on the hook for...
The reason why this makes sense - specs trade Credit Default Swaps like any other instrument - to game price changes.
When a Bear goes under, those specs who bought CDS for what they presumed to be a quick flip, hold all the way to 0$ when a Bear craters --- and then COLLECT from their counter party (CDS seller) who insured for the full rate of the bond...
Losses then spread to CDS sellers at an assumed rate of 10:1. Which brings down more instutions and the chain reaction is underway.
I don't know much more, at this point. Still looking into it.
Basically, Niederhoffer did this on a micro-scale - sell short premium and hope a black swan doesn't materialize.
Credit Default Swaps represent Corporate bond insurance sold by third-parties.
CDS is akin to AMBAC for mortgages. The ratio for insured bonds to actual outstanding is estimated* at 10:1. Not 1:1. Specs presumably hold the other 90%.
When an institution goes under, their third-party insured debt could - under those assumptions - be equivalent to 10X outstanding of actual debt.
For instance, Bear had, if memory serves, 127 Billion outstanding long term debt (bonds and loans). Assuming 10 to 1 = 1.27 Trillion third party CDS sellers are on the hook for...
The reason why this makes sense - specs trade Credit Default Swaps like any other instrument - to game price changes.
When a Bear goes under, those specs who bought CDS for what they presumed to be a quick flip, hold all the way to 0$ when a Bear craters --- and then COLLECT from their counter party (CDS seller) who insured for the full rate of the bond...
Losses then spread to CDS sellers at an assumed rate of 10:1. Which brings down more instutions and the chain reaction is underway.
I don't know much more, at this point. Still looking into it.
Basically, Niederhoffer did this on a micro-scale - sell short premium and hope a black swan doesn't materialize.
Quote from gnome:
If ONLY 5% of them are under stress, that's $25 Trillion. Can we cope with even that?
yes we can nationalize all banks buy out for $2/share.......problem solved overnight.........but that won't happen because wallstreet is hell bent on making sure 300 million americans bear the cost of their greed.
Quote from gnome:
Wheww [wiping brow].... I thought for a moment that I might have something to be concerned about.
Any concern about those who "believe" they are covered but will be unable to collect due to insolvency of some parties?
I've heard the story of the Trillions in derivatives and had always thought the same; there are shorts and longs so it doesn't matter what happens...someone will get the cash.
BUT what if the winners cannot collect from the losers? That's where a real problem could arise.
Quote from chewbacca:
yes we can nationalize all banks buy out for $2/share.......problem solved overnight.........but that won't happen because wallstreet is hell bent on making sure 300 million americans bear the cost of their greed.
As long as someone keeps making payments on Corporate debt, then a domino-default is avoided.
Quote from futures_shark:
I've heard the story of the Trillions in derivatives and had always thought the same; there are shorts and longs so it doesn't matter what happens...someone will get the cash.
BUT what if the winners cannot collect from the losers? That's where a real problem could arise.
Unfortunately, thats not the case.
Big financial institutions wrote more DOTM "puts" than they can cover. Tens of trillions, it seems.
IOW, they sold premium at a fraction of their exposure. Made tens of billions in exchange for tens of trillions in downside risk.
The losers wont be able to cover. And what they can, will send them into insolvency. Which will set off a chain reaction with more DOTM 'put' holders exercising...
Quote from megloman:
500T.. I prefer to say half a Q
Amazing, isn't it?
Sell half a quadrillion in downside risk and forgetaboutit.
They knew a wholesale collapse wouldn't be allowed. So they bet accordingly and forced a taxpayer bailout.
Now its just a matter of juggling risk long enough before the economy rebounds.
What's the combined value of the entire United States? Somewhere around there?