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Skeletons in the Closet: Credit Default Swaps and Housing
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This Link is located in the Public Channel Housing Bubble and Bear Links.
Posted by ian 2 years 78 days ago (seekingalpha.com). Views: 32
Tags: housing bubble |
| Related Tags: credit crisis gold wall street economics peter schiff inflation banks |
Credit Default Swaps (CDS) "has grown from a $1 trillion industry a few years ago to a $26 trillion industry today." That’s because punters (mostly hedge funds) can buy or sell CDS on an asset that they don’t own – simply as a bet on the perceived default risk.
Heavy concentration of CDS in a few hands makes a disastrous "chain reaction" possible:
CDS doesn't exist on an exchange, much of the volume transfers through few hands -- namely the big banks like Goldman Sachs, JP Morgan, Morgan Stanley, and the like. Nobody on the outside knows how much CDS these banks hold and what kind of directional exposure they have. If hedge funds hold $100 billion of CDS protection and Morgan Stanley took the other side of the trade, if that $100 billion of debt defaulted with no recovery, Morgan Stanley has to pay $100 billion to those hedge funds. I highly doubt Morgan Stanley has $100 billion in loss reserves set aside. Should Morgan Stanley be unable to pay its debts, holders of Morgan Stanley CDS would then come into play -- and suppose Lehman Brothers is on the short end of $50 billion of Morgan Stanley CDS. You can see where this is going. It sounds absurd to say, but it's not inconceivable that a CDS domino effect could destroy the debt and credit markets as we know them.
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