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Toxic Derivative: Credit Default Swaps

I’m surprised mainstream media does not talk about CDS (credit default swaps). 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.

Derivatives are THE Problem
Deteriorating home values themselves aren’t to blame for the current crisis. It’s the exotic derivatives and mortgage backed secuirities financial engineers cooked up that are the problem. When you hear the talking heads on the news dropping terms like “leverage”, derivatives are what they are really referring to.

The CDS derivative market is a $62 trillion market, and is rampant with wild speculation. This is a titanic figure considering the GDP of US is $13 trillion and the US mortgage market is $7 trillion.

What are CDS
Let’s say you just bought a shiny new sports car for $100k. You can buy insurance on the car by paying an insurance company $500 a year. The insurance company promises to buy you a new sports car if you total your car.

The insurance is like a CDS, except CDSs insure corporate bonds in the event that a corporation goes bust.

However, with a CDS, you can buy insurance even if you don’t 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 friend’s 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 can’t 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 doesn’t have), setting off a domino of bankruptcies.

Sound Similar?
This is a lot like mortgage backed securities. Banks kept lending money, expecting that housing prices would never fall. Analogously, insurers kept writing CDS contracts to investors and speculators, never expecting that a behemoth corporation like Lehman or Bear Stearns could ever go bust.

This is why you see the Fed stepping in to save companies like AIG. One failure will inevitably lead to another. Because of CDS, some companies really are “too big to fail.”

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Comments (38)
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38 Existing Comments
  1. Joe said:
    on September 30th at 06:27 am

    Love your analogy of how a CDS works.

  2. Guy said:
    on September 30th at 12:16 pm

    Thanks for the explanation. Very useful knowledge.

  3. Wendell Brock said:
    on September 30th at 12:46 pm

    Very good article – it explains the problem in very simple terms that anyone can understand. Only this website article posts the problem to be over $500 trillion in derivatives: http://www.brockfc.com/lets-understand-this-economy.html, which a third are owned by three major US banks. This is a major problem and it needs to be unwound but not with a $700 billion bailout. Keep up the good work.

  4. Hedge Fund Manager said:
    on September 30th at 02:44 pm

    Consider GM. The market cap of GM is $15 billion or so. There are about $1 trillion in credit default swaps bet on the success or failure of GM. It is virtually impossible for this to be hedged because there is not $1 trillion in GM bonds available as collateral.

  5. Smart Guy said:
    on September 30th at 02:50 pm

    Get a CD that is FDIC insured not insured buy anyone else. If FDIC fails there will be more to worry about then you CD….

  6. Hedge Fund Manager said:
    on September 30th at 03:05 pm

    Banks do not want you to know about CDS. They’re the bookies that dumped them onto the market.

    http://www.financialsense.com/editorials/engdahl/2008/0606.html

  7. LiveWellSimply said:
    on September 30th at 04:34 pm

    Great article! I didn’t understand how these worked until now. So the saga of greed and corruption continues. 62 Trillion? That’s almost the value of the entire planet’s GDP!

  8. Steve said:
    on September 30th at 04:56 pm

    Another ticking time bomb that very people know about are CDO’s, which do basically the same as CD’s. I highly encourage people to read these very interesting articles for more info on this subject…
    http://blog.inquirylabs.com/2007/06/27/colateral-damage-from-colateralized-debt/

    And

    http://www.minyanville.com/articles/BSC-CDO-collateral-credit-rating-agencies/index/a/13171

    Scary stuff to say the least. And I really wish people who post to this site would quit blaming GW Bush for the mess that Bill Clinton created.

  9. Mark said:
    on September 30th at 10:50 pm

    It’s not the Forclosures- it’s the deivatives;
    It is actually related
    http://www.FinancialBlackmail.US
    Mark Wyatt, September 29, 2008 (Black Monday)
    last updated September 30th (Bounce Tuesday)

    We are in the midst of the collapse of a roughly $1 QUADRILLION (1000 trillion or 1,000,000 billion) notional derivatives bubble (see here starting page 24, with interpretive help here and here). The Paulson plan is designed to save this derivatives bubble, or at least the underlying bets. Many in congress and mainstreet want to add a component to the plan to help slow foreclosures, possibly by modifying the terms of mortgages. This could include interest rate reductions, principal forgiveness, term increases, freezes/holds, etc.

    The problem is that the mortgages were securitized into mortgage backed securities, which were then pooled into collateralized debt obligations, which then tie into structured investment vehicles (the few which are left), hedge funds, and additional derivatives vehicles. Many of the MBS themselves are backed by credit default swaps, another type of credit derivative. Many of the above are highly leveraged. Some depend on a combination of leverage and a small interest difference (say 0.5% or less) to keep the derivative instrument alive. If the terms of the frozen mortgages start getting modified without new counter funds and fees to add new money (i.e., creating new mortgages at prevailing rates and new balancing derivatives contracts), then the whole paper ponzi-scheme could start collapsing under the weight of leverage, negative arbitrage, rating decay, etc. As a chain of counterparties start defaulting the whole bubble bursts. The derivatives bubble, since it is leveraged, will likely burst faster if the mortgages are modified then the slow death of the nation by foreclosure.

    What this means is that we appear to be in a situation that pits Main Street against Wall Street (at best to buy additional time to solve the unsolvable problem). We can either save the derivatives bubble (actually opush out its collapse further), but slowly destroy Main Street, or we can save Main Street, but put the derivatives bubble into bankruptcy. It does not seem likely we can do both. I.e., we can have a Great Depression II, or we can have Congress utilize their Constitutional authority to create a new monetary arrangement.

    Killing Main Street is not an option. The US has changed national banking multiple times in its history. We can do it again. Right now, though the financial system is failing, the houses still stand and generally are occupied, cars are on the streets, most people are working, food is being grown and distributed, weddings and births continue,etc. In other words, though on the edge, the underlying economy and society are still functioning. With the financial systems of Europe an Asia following in our decline, it seems likely that international cooperation to replace the currently failing fiat based central banking system is obtainable.

    Tell your Congressmen to choose Main Street, not Wall Street. Tell them to http://www.TakeBackTheFed.com

    [derivatives nominal values from: http://www.bis.org/publ/qtrpdf/r_qt0806.pdf
    http://seekingalpha.com/article/82648-thoughts-on-a-possible-economic-crash
    http://www.webofdebt.com/articles/its_the_derivatives.php

  10. Jason said:
    on September 30th at 11:11 pm

    They gotta pay the piper

  11. Mark said:
    on September 30th at 11:18 pm

    It’s not the Forclosures- it’s the deivatives;
    It is actually related
    Mark Wyatt,
    September 29, 2008 (Black Monday)
    last updated September 30th (Bounce Tuesday)

    We are in the midst of the collapse of a roughly $1 QUADRILLION (1000 trillion or 1,000,000 billion) notional derivatives bubble (see here starting page 24, with interpretive help here and here). The Paulson plan is designed to save this derivatives bubble, or at least the underlying bets. Many in congress and mainstreet want to add a component to the plan to help slow foreclosures, possibly by modifying the terms of mortgages. This could include interest rate reductions, principal forgiveness, term increases, freezes/holds, etc.

    The problem is that the mortgages were securitized into mortgage backed securities, which were then pooled into collateralized debt obligations, which then tie into structured investment vehicles (the few which are left), hedge funds, and additional derivatives vehicles. Many of the MBS themselves are backed by credit default swaps, another type of credit derivative. Many of the above are highly leveraged. Some depend on a combination of leverage and a small interest difference (say 0.5% or less) to keep the derivative instrument alive. If the terms of the frozen mortgages start getting modified without new counter funds and fees to add new money (i.e., creating new mortgages at prevailing rates and new balancing derivatives contracts), then the whole paper ponzi-scheme could start collapsing under the weight of leverage, negative arbitrage, rating decay, etc. As a chain of counterparties start defaulting the whole bubble bursts. The derivatives bubble, since it is leveraged, will likely burst faster if the mortgages are modified then the slow death of the nation by foreclosure.

    What this means is that we appear to be in a situation that pits Main Street against Wall Street (at best to buy additional time to solve the unsolvable problem). We can either save the derivatives bubble (actually opush out its collapse further), but slowly destroy Main Street, or we can save Main Street, but put the derivatives bubble into bankruptcy. It does not seem likely we can do both. I.e., we can have a Great Depression II, or we can have Congress utilize their Constitutional authority to create a new monetary arrangement.

    Killing Main Street is not an option. The US has changed national banking multiple times in its history. We can do it again. Right now, though the financial system is failing, the houses still stand and generally are occupied, cars are on the streets, most people are working, food is being grown and distributed, weddings and births continue,etc. In other words, though on the edge, the underlying economy and society are still functioning. With the financial systems of Europe an Asia following in our decline, it seems likely that international cooperation to replace the currently failing fiat based central banking system is obtainable.

    Tell your Congressmen to choose Main Street, not Wall Street. Tell them to http://www.TakeBackTheFed.com

  12. Mark said:
    on September 30th at 11:21 pm

    Sources for derivatives notional amounts last post:
    http://www.bis.org/publ/qtrpdf/r_qt0806.pdf (starting page 24)
    http://seekingalpha.com/article/82648-thoughts-on-a-possible-economic-crash
    http://www.webofdebt.com/articles/its_the_derivatives.php

  13. Steve 2 said:
    on October 2nd at 06:18 pm

    Thank you Steve for the most idiotic post on this forum I have seen in a long time. Blame Clinton? My friend, you have lost your marbles. When Clinton left office we had a SURPLUS. We now have a huge, huge DEFICIT and it is absolutely due to Bush and his band of incompetent thieves. His corrupt and incompetent underlings (like that criminal Cheney) have spent money they never had, gotten a lot of people killed in an invasion that should never had happened which was based totally on lies and deceit, and basically brought our country to it’s knees. There is going to be a lot more damage even when that worthless idiot leaves office because they won’t be able to do their daily coverups. His corruption put in place the unregulated and unethical framework for this current financial crisis. Now we and probably our children will have to pay for his inept and criminal rule, while our stature in the eyes of the rest of the world has been hit so bad it will never recover.

  14. Love said:
    on October 2nd at 11:09 pm

    Well said Steve 2 – well said!!!

  15. Johns Wu said:
    on October 3rd at 12:22 am

    Bill Clinton’s role, and all the democrats role in this whole less was trying to make every American a homeowner. He is also responsible for repealing the Glass-Steagall Act

  16. Jess said:
    on October 3rd at 01:44 pm

    Your explanation on CDS is totally superb! I now understand the workings of CDS better. I wish you are my finance derivatives professor.

  17. eugene said:
    on October 3rd at 09:03 pm

    you are write. the cds are a nuclear bomb on the economy

  18. Jeff said:
    on October 4th at 07:04 pm

    2 things

    1) ABSOLUTELY THE BEST EXPLANATION

    2) THE FAULT LIES WITH GOVERNMENT (LACK OF) AUDITING NOT NOT LACK OF REGULATIONS;AND THER IS A DIFFERENCE

    A REGULATION PRESUMES ( AND MAKES PEOPLE THINK) THAT THE REGULATOIN WILL FLAT OUT STOP BAD DOINGS
    WE KNOW THATS NOT TRUE AS LAWS LIKE NO MURDERS AND NO SPEEDING ARE CONSTANTLY VIOLATED

    IT COMES DOWN TO THE GOVERNMENT NOT AUDITING COMPANIES AND INSTEAD SPENDING TIME AND (MUCH) MONEY ON HOUSING AND EDUCATION WHICH THE FEDS HAVE NO BUSINESS BEING IN,

    BUT AUDITING COMPANIES THAT SAY THEY HAVE $$$ TO BACK THEIR POSITIONS, THATS DIFFERENT.

    THATS PART OF THE JUDICAIL SYSTEM WHICH THE GOVERNEMNT IS IN FACT GIVEN POWER TO AJUDICATE/INVESTIGATE

    I SAY IT AGAIN, GREAT POST /EXPLANATION ON YOUR PART BUT MY ADDENDUM SHOULD NOT BE OVERLOOKED

  19. Jeff 2 said:
    on October 7th at 03:18 pm

    Sorry if question is dumb but how did these instruments come to be if they are so bad and who allowed these instruments to proliferate? Is it state insurance commissioners, state or federal banking examiners? I understand greed motivates (don’t like it but it is what it is) but who was or was not questioning these products? I can understand (don’t accept but can understand) how lax mortgage lending evolved with the desire to enable everyone to buy houses (without responsibility) but I don’t see anything good about the CDS business. What am I missing? Its just that it looks like these instruments are something that belongs in Vegas and not in our nation’s financial system.

  20. Michael Andrews said:
    on October 7th at 09:58 pm

    We have the same problem in the uk, take a look at what hapenned Northern rock, bail out using tax payers money, the trouble was banks were lending way above incomes greed pure and simple when are they going to learn to act responsibly.

    Michael UK http://www.yourtrustedtradesmen.com

  21. The Dude said:
    on October 8th at 04:46 am

    I would say that we are watching the fall of the American Empire (Super Imperialists). It sounds like there are quite a few people out there who need to be executed or stoned to death! It looks like the religion of capitalism has reached the point of no returns! Greed and the love (lust) of money has consumed a generation that is destroying everything in its path to nowhere!

  22. Paul Jones said:
    on October 8th at 09:49 am

    Good article. The crazy leverage and pyramid scheme derivatives were enabled by deregulation and will still be impacting the system 2-3 years from now

  23. The Dude said:
    on October 8th at 07:31 pm

    This could all be part of the master plan to force economical globalization.

  24. ameera said:
    on October 9th at 02:13 am

    ^^^^^^ I second that.

    Thanks for this explanation. All of the issues, subprime mortgages, toxic derivatives all point to one root cause:

    TOXIC GREED.

  25. Steve3 said:
    on October 9th at 03:06 pm

    To Steve2.

    Your post is incredibly naive and another example of why politicians like Barney Frank stay in office for 30 years (you don’t know enough to make a decision yet you continue to have an opinion- and a vote). Cause and effect is a principle that you should understand before you make any statements.

    What Steve1 was pointing out was the Glass-Steigal allowed the investment banks to take on more risk and ultimately to lever themselves out 30-40 times. Glass-Steigal was passed in 1999 by Clinton and a Republican led Congress. The reality is that it has taken almost 10 years for the ramifications of the passage of this law to affect the world economy. The fact that we had a huge SURPLUS when Clinton was in office is a red herring (by the way, the Rep led Congress had more to do with that than Clinton but why let facts get in the way) since decisions (or lack thereof) made in that administration and the current admin have led to this crisis.

    The argument that a lack of regulation by the Bush administration is what caused this mess is too simplistic to give much credence. We have been operating under rules and regulations that were put in place, in many instances, in the 1930’s. Neither party has made any serious attemot to do anything about the lack of regulation and although the R’s controlled Congress for a number of years, they have not for the last two. Both parties have fed at the trough of corruption and have led us to this mess. The Dem’s for forcing banks to give millions of mortgages to people that could not afford it and both parties never had the guts to reform Fannie and Freddie (who by the way, set lending standards to all those mortgagees that have defaulted now). Why do you think F&F spent so much money lobbying Congress (and why Obama received the 2nd highest amount ever).

    Even the passage of the Community Reinvestment Act in the 1970’s (and its susbequent modification in the 1990’s) had a hand in this crisis by forcing banks to lend money to unqualified buyers. Remember, the leverage in the system did not cause the mortgages to default here (although the impact that leverage applied to these bad loans is what is causing the meltdown).

    The real story is that both parties are the causes of this catastrophe. No one can hold their head up here.

  26. Investor Buffett said:
    on October 9th at 06:24 pm

    Thanks for the explanation, I always thought CDSs were dodgy, taking out insurance on someone else’s property just encourages disreputable activity. I like Charlie Munger’s description of derivatives “to call derivatives sewage is an insult to sewage !”

  27. Steve(1) said:
    on October 10th at 12:44 am

    Steve2 – did you even bother to follow the links and read up on CDO’s and CDS’s?? Or are you suffering from a case of… my mind is already made up, so don’t confuse me with facts??

    #1 – the reason there was a HUGH surplus when Clinton left office is because he sold most (if not all) OUR national parks to overseas interests.

    #2 – Bill Clinton is a great salesman. He had everybody (apparently you included) convinced that the economy is in great shape that we’re all fat, happy and stupid and we can spend our money like there’s no tomorrow.

    During those years the amount of money (percentage of income) people were putting into their saving accounts, CD’s, etc dropped to the lowest level since the end of WW-2. In fact it actually went slightly into the negative.

    Home prices rose at a lightning pace, sometimes doubling in value in 1~2yrs, problem was, it wasn’t “real” wealth, it was just an illusion. But people bought into it and used their houses to finance all the toys (boats, PWS’s, giant motor coaches, etc) they wanted by taking out 2nd’s, 3rd’s, and so on to buy those toys.

    When the economy slowed down, they suddenly found themselves being called on to make payments on all those toys and found they couldn’t do it. So they started living on credit and just kept digging themselves in deeper and deeper because their $125k house was not the $250k house they thought was.

    #3 – Regarding GW Bush. I made that comment because every forum I visit, goto what-have you wants to blame him for everything that is wrong with our country today. I’m sorry but one man cannot single handily destroy an entire country and it’s economy.

    The government does not exactly work at lighting speed, as such it takes time for policies (good & bad) to work they’re way through the system as Steve-3 so correctly pointed out.

    The current financial crisis was not necessarily caused by any single entity, institution or situation. It is the result of the American people over spending, shady business practices by investment firms, lack of government regulation of those firms, corporate greed and so on. This is nothing more than history repeating itself, the result of people failing to learn from mistakes made during the 1920’s which eventually led to the market crash of 1929.

    #4 – Regarding the war in Iraq… when Bush senior left office, he gave Clinton a Saddam that was in control, having just got his butt kicked in desert storm one. When Clinton left office 8-yrs later he handed GW Bush a Saddam that was out of control again.

    In the interest of being fair and balanced, I will admit that GW unlike his father, did rush in hastily and apparently without a long-term plan outlining a specific set of goals and a timetable for accomplishing them.

    As things are now, we cannot just up and leave as Obama promises! If we do, Iraq and that whole region of the world will go into chaos and things will really get out of hand.

  28. Mike S said:
    on October 10th at 02:03 pm

    The corporate heads of AIG knew the risks of issuing these CDS instruments, yet did so anyway. By their negligent actions many have been harmed. Yet from my understanding, the CEOs of these companies escape with their hundreds of millions!

    Time for a class action/civil suit to be filed against individual CEO’s. They should lose ALL of their assets. Justice should be served!

  29. Robert said:
    on October 11th at 02:46 pm

    Why can’t the government nullify all uncovered CDS? That is, all the contracts on cars that aren’t owned by you are now null and void.

    Wouldn’t that take care of the problem now while also discouraging future speculation?

  30. Troopergate said:
    on October 14th at 12:04 pm

    Steve1&3: B.S. Bush and the past 8 years of republican rule are to blame. “The buck stops here?” – guess not.

    The repubs have committed this country to an orgy of greed, power and corruption under their watch. But its the same old tactics with repubs: Blame the last democrat no matter how far back – what a joke.

    If you are hired as a babysitter#1 and the previous babysitter#2 removed a gate; and the baby fell down the stair on YOUR watch – who’s fault would it be? Forget that it was a different TIME, forget that the baby never went into the room with the gate under babysitter #1, forget that it was babysitter#2 who let the baby GO INTO the room where the gate was removed, forget that it was babysitter#2’s responsibility NOW. – That’s the logic the repubs are asking us all to swallow. B.S.

  31. Boneman said:
    on October 16th at 11:54 pm

    I wish everyone would quit blaming Barney Franks for this. Fannie and Freddie were fine 2 years ago and did not need to be regulated. I don’t know what happened in the last two years but Senator Franks said Fannie and Freddie were fine and did not need regulation or investigation and I wish people would quit with harrasing him.

  32. Marc said:
    on October 19th at 07:19 pm

    The problem for the American people is that if a large company is enmeshed in highly leveraged CDSs, it can engage in risky behavior that would otherwise be stupid because it has the full knowledge that the government will have no choice but to bail it out. Here are two possible solutions that would work followed by what will actually occur.

    Solution 1 is to FULLY recognize that keeping the financial system close to the way it is now is in the public interest. Regulation for the future won’t be enough. Somehow, current CDSs will need to be nullified and both parties will need to be partially reimbursed according to some formula. The risk-averse leveragers who thought they had their butts covered will get pennies on the dollar instead. This nullification will smell like an ex post facto law and it may take a constitutional amendment to make it work. CDSs and similar instruments should be banned and activities like mortgage trading should be as public as Deeds.

    Solution 2 is to let them all go bankrupt. The financial system as we know it will collapse and (once again) the risk-averse leveragers who thought they had their butts covered will get pennies on the dollar instead. This will lead to a tragedy for many people for a number of years, but there are other financial systems like depositor-owned credit unions and similar risk-averse entities that are ready to serve us since these nitwits failed.

    In the long run, either of these solutions will work. But, of course, neither will occur because the easiest thing to politically will be to continue to bail out every large company when it comes close to failing. Both Democrats and Republicans have no reason to implement either solution when it is easier and more politically sound to continue shifting money from relatively poor taxpayers to relatively well-off investors. Those who are well off provide support to political campaigns that are perfectly designed to deceive poor taxpayers into continuing to provide support to those who are well off. Only a third party will successfully implement a true solution. Greens or others with socialist leanings will implement #1. Libertarians or others with Laissez-faire leanings will implement #2.

  33. LaVern Isely said:
    on November 11th at 04:56 pm

    I hope someone comments about the G-20 meeting coming on Saturday, November 15. These Derivatives went from EXOTIC to TOXIC in a matter of weeks. Now we are having Investment Banks as well as credit card comapanies such as American Express trying to qualify as a Commercial Bank just so they can get a handout from the government. This happened almost overnight. Who was watching free enterprise. That’s why Congress should reinstate the GLASS-STEAGALL ACT quick.
    Yours truly, Disgusted Middleclass Taxpayer, LaVern Isely

  34. Steve said:
    on December 9th at 04:32 am

    #
    Mark said:
    on September 30th at 10:50 pm

    It’s not the Forclosures- it’s the deivatives;
    It is actually related
    http://www.FinancialBlackmail.US
    Mark Wyatt, September 29, 2008 (Black Monday)
    last updated September 30th (Bounce Tuesday)

    We are in the midst of the collapse of a roughly $1 QUADRILLION (1000 trillion or 1,000,000 billion) notional derivatives bubble (see here starting page 24, with interpretive help here and here). The Paulson plan is designed to save this derivatives bubble, or at least the underlying bets. Many in congress and mainstreet want to add a component to the plan to help slow foreclosures, possibly by modifying the terms of mortgages. This could include interest rate reductions, principal forgiveness, term increases, freezes/holds, etc.

    The problem is that the mortgages were securitized into mortgage backed securities, which were then pooled into collateralized debt obligations, which then tie into structured investment vehicles (the few which are left), hedge funds, and additional derivatives vehicles. Many of the MBS themselves are backed by credit default swaps, another type of credit derivative. Many of the above are highly leveraged. Some depend on a combination of leverage and a small interest difference (say 0.5% or less) to keep the derivative instrument alive. If the terms of the frozen mortgages start getting modified without new counter funds and fees to add new money (i.e., creating new mortgages at prevailing rates and new balancing derivatives contracts), then the whole paper ponzi-scheme could start collapsing under the weight of leverage, negative arbitrage, rating decay, etc. As a chain of counterparties start defaulting the whole bubble bursts. The derivatives bubble, since it is leveraged, will likely burst faster if the mortgages are modified then the slow death of the nation by foreclosure.

    What this means is that we appear to be in a situation that pits Main Street against Wall Street (at best to buy additional time to solve the unsolvable problem). We can either save the derivatives bubble (actually opush out its collapse further), but slowly destroy Main Street, or we can save Main Street, but put the derivatives bubble into bankruptcy. It does not seem likely we can do both. I.e., we can have a Great Depression II, or we can have Congress utilize their Constitutional authority to create a new monetary arrangement.

    Killing Main Street is not an option. The US has changed national banking multiple times in its history. We can do it again. Right now, though the financial system is failing, the houses still stand and generally are occupied, cars are on the streets, most people are working, food is being grown and distributed, weddings and births continue,etc. In other words, though on the edge, the underlying economy and society are still functioning. With the financial systems of Europe an Asia following in our decline, it seems likely that international cooperation to replace the currently failing fiat based central banking system is obtainable.

    Tell your Congressmen to choose Main Street, not Wall Street. Tell them to http://www.TakeBackTheFed.com

    [derivatives nominal values from: http://www.bis.org/publ/qtrpdf/r_qt0806.pdf
    http://seekingalpha.com/article/82648-thoughts-on-a-possible-economic-crash
    http://www.webofdebt.com/articles/its_the_derivatives.php

  35. Joe said:
    on December 25th at 02:17 am

    Love your analogy on how a D&C works.

  36. LaVern Isely said:
    on June 22nd at 03:00 pm

    You were right on in your September 30 article and unless they get REAL regulations on the HEDGE FUND DEALERS, things will only get worse. I understand they are eyeing up the bond market. There is nothing sacred with these people. Wouldn’t it be nice if the big banks would lobby for reinstating the GLASS-STEAGALL ACT and get some common sense back into banking? Sad to say, that will never happen unless the government DEMANDS IT, even to the point that the government might have to nationalize one of the big banks. The government is going to have to save the capitalists, otherwise they are going to destroy free enterprise.
    Yours truly, Disgusted Middleclass Taxpayer, Public Citizen and AARP Member, LaVern Isely

  37. carol said:
    on November 25th at 11:52 pm

    Which investor profits from a foreclosure if it is sold again? The one who bet on the toxic loan or the one who thought it was a triple AAA loan?

  38. Jennifer said:
    on June 25th at 09:31 am

    I was up for a writing job that required me to have knowledge of cds. This is one of the best-written articles I have ever read about anything anywhere. Thank you for explaining this so clearly. Signed, your new fan.