[Eli]

New York just changed the rules of the CDS market, now they will come under government purview as they always should have.

Why is this important, these debts are hedges against other losses they all were written before without any oversight. Basically hedge funds could right insurance for others whether or not they had the money to pay off the debt or not.



Link

Any future hedging just shot the moon, this is a 60 Trillion dollar problem now, the bailout can't stop this either way.

It is a problem that is larger than global GDP.

[roccman]

Nice pic!

For those who think your FIC0 will mean anything...in...oh...a week.

Think again.

Got food?

[TheDude]

Far out.

"And a Blind Man Shall Lead Them."

[Cashmere]

Dude, love the avatar.

Do you want me to eat a garbage can?

[Eli]

Roubini was predicting this would happen, your going to see a ton of hedge funds going BK.

[TheDude]

Put the glasses on. Put them on!
Fuck you!
Look! They're everywhere.
They can see us.
They're at Fifth and Spring.
Hold on. You aren't the first one
to wake up out of a dream.

[NoWorries]

Alright, that's a big number. But what is the connection to the Bailout?

I agree we're in Trouble no matter what, but I don't quite understand your post.

[Specop_007]

Nice pic!

For those who think your FIC0 will mean anything...in...oh...a week.

Think again.

Got food?

What should we bet this time? I almost feel bad though....Should you win I most likely couldnt pay.

[burtonridr]

Alright, that's a big number. But what is the connection to the Bailout?

I agree we're in Trouble no matter what, but I don't quite understand your post.

Yes could you elaborate a little?

Post a link that explains why this is a financial/economic a bomb?

[mkwin]

New York just changed the rules of the CDS market, now they will come under government purview as they always should have.

Why is this important, these debts are hedges against other losses they all were written before without any oversight. Basically hedge funds could right insurance for others whether or not they had the money to pay off the debt or not.



Link

Any future hedging just shot the moon, this is a 60 Trillion dollar problem now, the bailout can't stop this either way.

It is a problem that is larger than global GDP.

]

Your link doesn't say anything about a problem in the CDS market?

The face value of the CDS market is not the total liability. The total liability would be a fraction of that, maybe 5% and that would only happen if 60 trillions worth of debt defaulted all in one go and, further, it a zero sum game so there would be a winner and a loser. The money would not disappear. CDSs are like derivatives, they sound like scary numbers but the scary numbers are just the face value off the contract and the total about of money that would ever change change is a fraction of that face value.

So it is not a 60 trillion problem not nearly . It is however a problem if you are a shareholder of AIG or Ambac. The government would just take over any failing firm though and wipe out the equity holders.

[Cashmere]

Closing the barn door after the horses have left . . .


I'm not sure this makes any difference.

Everybody has known for some time that the CDS would never be honored in the event of a systemic melt down.

[jbrovont]

I'm still working on synthesizing this into an effect. The Governor of NY has invoked an interesting part of US law here - a State can't make a law restricting the power of a fedral law, but that can enforce a law at state level not covered by federal law, or impose a law more restrictive than a federal law.

Our system works basically, if there's no law against it, you can do it until there is. (implied freedom rather than implied restriciton)

If the law is retroactive, since many of the banks are based in NY, we could very well see this mess of $60+T CDS dragged into court as null and void since they are insurance policies which have now been found to be issued illegally.

Even if it's not retroactive, I imagine a company faced with ponying up and going bankrupt, may attempt to test this in court in a plethora of ways.

I wouldn't be surpirsed if most of my credit cards stop working in the next few weeks. HELOCs are probably dead - WaMu has already been quietly canceling current accounts for a few months. Construction loans and blankets are probably toast. Small to medium business lines of credit. Student loans are federally backed, but many are brokered through private banks - I don't know what effect this might have on those.

[jbrovont]

Sorry - I left out the core of the explanation lol!

A credit default swap is an insurance a bank issues to another bank that says "If this debt goes bad, we'll pay you x% of what you lost"

Banks use them to make bad risks look like better risks.

Without CDSs, there's no way to dress up a bad bet, so loans banks make in the future will have to be able to stand on their own risk wise, and look like a good idea.

Companies value their bonds and stocks based on their financial health. Having CDSs covering your bad debts makes you look more fiscally sound on paper, and thus increase your "rating." (Think Moody ratings).

Fund managers and government retirement funds buy stocks and bonds based on rating requirements in their charters or bylaws. For instance, the State of Michigan employee retirement fund can only buy or hold securites with, say, a "AAA+" rating.

Since CDSs are now in question, Moody and other ratings companies may (probably) choose to re-evaluate securities without the CDSs being figured in. This will result in a downgrade of the rating.

Many funds and retirement programs may be forced to dump those securities. If it all happens at once, there will be a firesale of securities from some of the largest financial institutions left. Prices of their stocks will plummet.

Low stock prices makes it harder for them to raise money to cover losses on their debts, and it makes getting liquidity to pay creditors harder. This can trigger further downgrades. Rinse. Repeat.

At this point, either they BK, get bought, or sidle up to Big Momma Fed for their turn at the teat.

Either way it's bad for anyone with a retirement fund, or even mid-range investors. The only way you win is if you short (can't do that now) or you're involved in buying them in the BK.

It's also bad news bears for the US economy since tight credit lines = less commerce = less taxes = less bond value = less foreign investment.

The USD is likely to get punished.
Think Jet Li or Bruce Lee vs. Chuck Norris.

[burtonridr]

Thanks.... Jeebus these banks sure know how to create a paper trail mess with stock values

[Eli]

Yes it needs further explanation.


New Link

CDS market NYSUN

"The credit default swap market is the ultimate bubble, and it is about to collapse," the managing director of Institutional Risk Analytics, Christopher Whalen, said. "It is a Ponzi scheme, and is basically the same method as a bookie uses."

Hedge funds have been employing this strategy over the past several months as the financial sector caves in, some analysts and industry observers said. "If they had tried this any time in the last three years, they would have gotten torched; it is only very recently that something like this could work," the chief strategist at Fusion IQ, Barry Ritholtz, said, adding that he had no first-hand knowledge of the strategy.

Think of the CDS market as a bet you make, that a deal is going to go bad, and you make the bet without actually having the money to pay up if you loose.

[DantesPeak]

The effective date is January 1, 2009. Also it exempts existing CD swaps.

However even with the exemption, the CD swap market could grind to halt as issuers struggle to meet all the new regulations.

Based upon many articles posted here, the derivatives appear to be a kind of Ponzi scheme, where derivative problems are covered up by issuing more derivatives.

So yes, this thing could blow up at end year - if the system holds together that long.

[efarmer]

You are describing make believe insurance to buy
bogus agency ratings for dubious investments and
worried about having to pay them off at face value.

Hank the Tank could just nationalize the agency
rating companies and help them make excellent
ratings decisions.


The people who bought the CDS in most cases had
to know they were buying fantasy points for real
agency ratings, and I would suspect, the agencies
had to know they were using sprinkles of fairy dust
to festoon castles in the air.

You don't pay for this kind of stuff with real money,
you just ask Tinkerbell to fly it back to Neverland.

[idomar]

let me get this straight..........

US gov't bails out MBS's...........$700billion

US & UK ban short selling because of EVIL speculators manipulating the market (you are only allowed to manipulate up UNLESS it is oil, then only down)

there is now nothing to wicket keep (sorry but i am English and baseball confuses me)

stocks rally for one day

they lose all the 'gains' the next day

CDS's are about to go critcal mass and they are nearly 8 times larger than MBS's

what is keeping the markets from collapse?

what is keeping society from collapse?

please......anyone.........please..........give me an answer, I have financial qualifications and I can't figure it out.

From my POV, we are at missed meal 2 and asking the question 'what is for dinner?'

I have upped my concern level from miffed to peeved to someone is now going to get a kick in the jacobs followed by a Glasgow kiss and a brummy screwdriver to the old blackpool!

we are all daffy ducked

[TheDude]

"Blackpool"?

Hank the Tank could just nationalize the agency
rating companies and help them make excellent
ratings decisions.

That would be...going too far...

Remember the episode of the Simpsons where Homer builds a time machine out of a toaster and keeps returning to the present where something is askew? At one point he's in a world where Ned Flanders is dictator, there's an audience of people strapped to their chairs and robot arms swoop down to force everyone to grin madly.

But actually the credibility of Moody's is already suspect: Moody’s Says Workers Rated Some Securities Incorrectly

By VIKAS BAJAJ
Published: July 2, 2008

Already under intense scrutiny for its role in the credit crisis, the Moody’s Corporation said Tuesday that some employees had violated its code of conduct in rating complex European securities.

The company said that it would discipline and possibly fire employees who had been involved in rating the debt, which are known as constant proportion debt obligations. Separately, Moody’s said it was replacing the executive, Noel Kirnon, who was in charge of its structured finance business at its subsidiary, Moody’s Investors Service. It would be the second high-profile executive departure announced by the company in less than two months.

The news comes as policy makers around the world are looking into how Moody’s and its competitors, Standard & Poor’s and Fitch Ratings, gave high ratings to mortgage and related securities that turned out to be far riskier than their ratings would have implied and have cost the financial system hundreds of billons of dollars. The companies are the subject of several investigations in the United States and Europe.

[idomar]

"Blackpool"?

Blackpool rock - cock!