If you thought the Sub-Prime Mortgage scandal was scary.....

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Lincolnshirebodger

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or the LIBOR (interbank loans) collapse was expensive at £2 Trillion, wait till you read here wahts coming - The Credit Default Swap Tsunamil AKA The Derivatives Chernobyl...

http://www.globalresearch.ca/index.php?context=va&aid=8634


FOR THOSE WHO WANT THE CUT DOWN VERSION:

Basically, it works like this. Millions of companies round the planet raise money by 'Corporate Bonds'. Basically, you give Company A a sum of money, and in exchange, instead of shares, you get an IOU. Now this IOU attracts regular interest payments from Company A as well as payments like a shareholder. After a fixed period of 1 - 30 years, the Company gives you your money back, you stop collecting interest and dividends, and the deal is complete.

What happens, though if Company A is unable to pay you back at the end? Well, thats what a Credit Default Swap is for. Basically person C says to you, 'give me some of the interest payments you are getting, and if Company A is unable to repay the Bond, then i will repay it'. A bit like an insurance policy on the debt. You cant lose, either the company succeeds and you get paid, or it fails and you get paid.

However, unlike some financial deals, this market is totally unregulated. So the people who provide the CDS's can g'tee bonds (who's repayment value if the bond defaults to them) whos value far exceeds the actual amount of money they have. Some Hedge Funds, for example, worth £50M are tied to g'tees of £500M.

Some big companies, on the other hand, have bonds out on them that exceed the value of there assets. SO, as you can imagine, it only needs a couple of big companies to fail (and we've seen some massive companies fail in the last 5 years) and it woudl trigger a massive chain of debt default as all the intertied CDS's failed.

The scale of the problem with the Sub Prime Collapse was $2Trillion, the potential debt we are talking here is SIXTY TRILLION DOLLARS. It will make what has happened so far look like a picnic.

Now you see why its called the CDS Tsunami.................
 
Could you expand on paragraph four a bit more please.

I get the idea in paras 1 - 3 and I see what you're saying about some big companies issuing corporate bonds with a value greater than their nett assets, but surely not all corporate bonds are like that, and even if some very big companies failed the hedge fund that wrote the CD might fail (As did one in late 90's - called hmmmn Long Term Capital something?) but it would not effect all the others.......or would it :?:

It's not good that this market has grown so big and there is no regulation I agree it's a worry, but I can't quite see how some big company failures would cause all the CD market to implode, but I'm not an expert in these things, just a poor tax payer looking in :cry:
 
Losos":f9fhk3b6 said:
Could you expand on paragraph four a bit more please.

I get the idea in paras 1 - 3 and I see what you're saying about some big companies issuing corporate bonds with a value greater than their nett assets, but surely not all corporate bonds are like that, and even if some very big companies failed the hedge fund that wrote the CD might fail (As did one in late 90's - called hmmmn Long Term Capital something?) but it would not effect all the others.......or would it :?:

It's not good that this market has grown so big and there is no regulation I agree it's a worry, but I can't quite see how some big company failures would cause all the CD market to implode, but I'm not an expert in these things, just a poor tax payer looking in :cry:

The article explains it in more detail.

Other points that I didnt mention are:

-the 3rd party lenders who g'tee the bond then insure themselves to spread the risk, and those peoepl also insure themselves , so one company collapsing causes a ripple that affects a big chain of people.

-You can even take a CDS out on a bond you dont own. Its like betting next doors house will burn down then when it does you get the value of the house.

-theres no limit to the value of the bonds you can issue as a company. Its secured only on the transient value of some hypothetical shares, so you can raise vast amounts of money on literally paper assets that in reality arent worth squat.

The value of the amount of trades in the Derivatives Market last year was $506 Trillion. Thats more than 10 times the Gross Domestic Product of the entire planet.
 
Thanks - better go read the article :oops: have been short of time this week but maybe tomorrow with a bit of luck
 
Never mind about those people,thats small potatoes.The next big bust comes from credit cards...people are loseing their jobs and they have been chargeing everything up to houses for Pete sake..when all of these credit cards are in default then you`ll see the whole world jumping out of windows,not just Wall street bankers.
 
I'm not into all this high finance, but as far as I'm concerned, it still all comes back to Mr Micawber..... Income...19 shillings, outgoings...20 shillings, result ..... misery, I know I probably sound like a stuck record, but if any one out there can prove me wrong about personal finance management, feel free to educate me, It will take a hell of a lot to convince me otherwise, how can you spend what you do'nt have?

Regards,

Rich.
 
Grinding One":3v2zn96v said:
Never mind about those people,thats small potatoes.The next big bust comes from credit cards...people are loseing their jobs and they have been chargeing everything up to houses for Pete sake..when all of these credit cards are in default then you`ll see the whole world jumping out of windows,not just Wall street bankers.


Hmm, i wouldnt class $60 trillion as small potatoes, and thats the potential size of the CDS collapse.................the credit card problem is only $940 billion, not even $1 trillion :D - thats peanuts!!!

Now do you understand why its known as the 'Credit Default Swap Tsunami' or alternatively the 'Derivatives Chernobyl' ??
 
Grinding One":202mp629 said:
Never mind about those people,thats small potatoes.The next big bust comes from credit cards...people are loseing their jobs and they have been chargeing everything up to houses for Pete sake..when all of these credit cards are in default then you`ll see the whole world jumping out of windows,not just Wall street bankers.


I think the next big bust in the UK is about to come from a combination of repossessions (foreclosures) and huge credit card debts.

Repossessions are running currently at around 60,000 a year and rising fast. With 2 million households likely to be in negative equity over the next few years http://www.timesonline.co.uk/tol/money/ ... 969314.ece it looks almost inevitable that half a million homes will be repossessed over the next five years or so.

My guess is that the people with big mortgages in relation to the value of their homes are the very same people who have huge debts on their credit cards, together with outstanding personal loans.

If we assume that the half a million people getting repossesed have an average shortfall on their mortgage after their home is forcably sold of £50,000, and that they owe another £20,000 on cards, the exposure of the banks is massive.

500,000 x 70,000 = 35 billion pounds

All of this will have to written off by the banks in its entirety. Laws on insolvency were relaxed a few years ago making it a fairly straightforward procedure to go bankrupt. I find it inconceivable that anyone in the position of having their home repossessed would not simply go bankrupt and have all their debts wiped clean at a stroke.

Of course, all these repossessed properties coming onto the market will depress house prices even further, compounding the problem.

We will then be hit by the 'Credit Default Swap Tsunami'!!

Anyone who's future depends upon bank borrowings, investments, etc needs to protect themselves now.

The problems have only just started.

Dan
 
Gotta watch out for double-counting your servings of doom, Dan, as many if not most of those same loans and credit card debts are the very things which were securitised - and are being marked to market at 50p in the £,etc to cover these default expectations. Indeed, the write-downs are viewed by quite a few as being over-estimated as part of the herd instinct to panic. So to a large extent this is the current problem, not a new future one, and these losses have been written off and are the cause of the bank's current woes.

Our biggest risk is still that we talk ourselves into a serious recession.
 
Time to get ready for going back to barter i think.

Wonder what the price of seasoned oak is in chickens cubic yard?
 
Lincolnshirebodger":2j54xvpd said:
Time to get ready for going back to barter i think.

Wonder what the price of seasoned oak is in chickens cubic yard?


Funny you should say that. I've just been talking with SWMBO about getting some chickens in the back garden. We've already got 3 allotments so are pretty well self-sufficient in veg.

My best barter was many years ago when I was discussing a job with a potential client. I noticed that their car had a 'For Sale' sign in the window.

The deal was done and I drove away in a nice Fiesta for her indoors!

Dan
 
The news this morning is that the government is considering the purchase of a further 2 aircraft carriers to create work.

I think it would be better to double the pension for OAPs at least we have got the time to spend it.

No good giving it to single mums, they only seem to buy large plastic toys for their children. :)
 
Everyone was raised to learn how to spend money and the banks wanted you in debt so they had you as a slave for life.
Its time they get in the slave suit.They are still sending me credit card forms,to sign up for more credit...Why? Its costing them a lot of money to mail this stuff out and I do not reply heck my kid just sends the stuff back in their own mailers but doesn`t write on it...so it cost them both ways in the mail.Do they get the hint? Nope they just send more... :roll:
Houses are being foreclosed rapidly here,there are no jobs,but low paying ones.You can not live on them wages so you need two of them type of jobs to break even every week...hence you are a slave.Never get ahead and when your to old to work you`ll be in the street begging for money.
The credit card debt may be only a trillon or billion dollars but its the straw that breaks the camels back.
 
devonwoody":9ebx0jgz said:
The news this morning is that the government is considering the purchase of a further 2 aircraft carriers to create work.

The bad news is that due to cutbacks, they have to be made out of MDF and Plywood. The guns will be turned out of beech in the local Secondary School Technology Class, and the WI will be knitting a cover for it.
 
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