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.................
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.................