BosyBillups Wrote: ------------------------------------------------------- > > My question: If the next time bomb is corporate > defaults and the CDS market explosion, what kind > of carnage can we expect from that? Save this post. He’s right. This is the killer. The disaster scenario is that this current problem is just a set-up for an enormous crushing from the CDS market. I don’t know, but I can think of some. We need a new thread…
then auto loan default, credit card defaults…more to follow amigos!!!
Actually, I think those come first. So when I worked for the Army, I went to a talk once on a plan called “Army 30” (hopefully it was unclassified or I’m going to jail). It was about a plan that the gov’t had worked out to invade the Soviet Union and take Moscow using conventional forces. It was full of ridiculous assumptions and the whole thing was ludicruous but the point was that the military had plans on the shelf for anything. If the US suddenly decided that we were going to take the Kremlin without making it radioactive, it’s better to have a plan than no plan. The Administration had no plan for a interconnected MBS/CDO melt-down though it was clear for a year or two that it was possible. Do they have a plan for a CDS melt-down that could be much worse (or maybe not as bad, but the numbers are really big)?
can you guys explain this to me, because I am not as smart as most people on this board other than some unemployment (a couple % pts maybe) and people who use credit to pay off other credit, or lose their homes, why do people keep thinking the average American is going to suddenly start defaulting on all his loans? Most people I know don’t rely on their stock market investments to pay their bills. Now if the argument is that all the structured products based on these liabilities are going to go to hell like MBS, then that I understand. I just dont see a huge upturn in personal auto loan defaults for example. Any comments?
I THINK I understand the potential for a CDS disaster. NOBODY knows the potential for disaster here. They just don’t. It’s a good thing 99.999% of people don’t understand the danger here. The key is: Despite the hundred of trillions of notional value that’s quoted out there, the actual value of all the derivatives in the world is actually 0…because it’s a zero sum game. The part that gets scary is that we don’t know the DISTRIBUTION of these securities. October could be a very frightening month. We just don’t know. NOBODY does. That’s all I’m saying.
people lose jobs = lost income = no payments on debt Businesses can’t get loans = lost inventory/lost payrolls = unemployment = see above Consumers scared = don’t buy goods = businesses don’t have income = see above and the trail continues.
bigwilly Wrote: ------------------------------------------------------- > people lose jobs = lost income = no payments on > debt > Businesses can’t get loans = lost inventory/lost > payrolls = unemployment = see above > Consumers scared = don’t buy goods = businesses > don’t have income = see above > > and the trail continues. A vicious cycle indeed
I would think leverage. It only took small percentage of people to default (fall behind) on their home mortgage to bring down the MBS market. Given the amount of leverage the IB uses, I would assume it would take a small percentage of credit card, auto loan default to bring down that segment.
To address part of it: " why do people keep thinking the average American is going to suddenly start defaulting on all his loans?" They don’t. But it might happen and if it happens we would like to keep the disaster as contained as possible. A long time ago, there was an interesting debate on AF about whether CDS reduced the amount of risk in capital markets (CDS are supposed to be about risk transference to people who can take it better) or whether the sheer volume created new risk in markets. I was probably in the former camp, but the latter is looking more like correct. GM has (I dunno, too lazy) $150B worth of bonds outstanding. What is the total notional size of CDS traded on GM (I dunno and couldn’t know even if I wasn’t lazy)? What happens when GM with a huge negative net worth decides to call it a day and default? Given the way that the current debacle has spread, this could be really ugly.
OK here’s something else to think about FNM and FRE CDS’s settle on OCTOBER 6 (estimated 500 billion payout) LEH OCTOBER 10 WM OCTOBER 23 Now are you guys starting to connect the dots?
I guess i’m drastically underestimating the potential unemployment possibilities for the next few years. Also to me, credit cards and auto loans <> mortgages. Much easier to get a crap mortgage, option arms and resets dont really exist in those markets, those assets are already depreciating (people werent buying betting on huge appreciation in value to continue) I do agree that the commercial side of this with businesses not being able to get credit is the more glaring problem right now
i have problems with the view that CDSs are like insurance policies. in a regular insurance policy atleast there is huge amount of real life data for the actuaries to crunch and arrive at a model to determine the reserves the company needs to have with them to tide over a crisis like katrina for example. with CDSs ,the seller probably tries to hedge his risk but ofcourse this is (now) huge counterparty risk. my point being, AIG’s traditional insurance business wouldnt have put them in danger since the risk management for it is fairly established. with derivatives,its all unknown unknowns. if AIG still has exposure to CDS (i dont know,could someone confirm), would it mean, the fed bailout of 85 billion could be wasted?
Dsylexic Wrote: ------------------------------------------------------- > i have problems with the view that CDSs are like > insurance policies. in a regular insurance policy > atleast there is huge amount of real life data for > the actuaries to crunch and arrive at a model to > determine the reserves the company needs to have > with them to tide over a crisis like katrina for > example. > with CDSs ,the seller probably tries to hedge his > risk but ofcourse this is (now) huge counterparty > risk. > > my point being, AIG’s traditional insurance > business wouldnt have put them in danger since the > risk management for it is fairly established. with > derivatives,its all unknown unknowns. if AIG still > has exposure to CDS (i dont know,could someone > confirm), would it mean, the fed bailout of 85 > billion could be wasted? AIG is wasted anyway. The Feds are going to get their money and AIG gets distributed so that the functional units are left as functional units. The Feds are just financing a liquidation.
Fun with numbers: Credit market debt = 51 trillion CDS market = 61 trillion (not’l) derivative market = 1,400 trillion (not’l) Bailout bill = 700 billion The not’l numbers are deceiving, but just think about it. Fortis bank = leverage of 33:1. 3 times the GDP of Belgium (it’s domiciled country) Deutsche Bank = leverage of 50:1. 80% the GDP of Germany ---- Now a observation (from the fed-fund thread). The point is that fed cuts don’t really matter. Equities, Bonds, Commodities, Currencies, Real Estate are DEFLATING. We may be entering into a time of deflation, not inflation, on TOP of a very slowing global economy, and a CDS market just waiting to explode. I need some xanax now. whoo, that’s better. Okay, the CDS and derivative markets function best when confidence, growth, and liquidity are high. All three of those have reversed trends. I don’t know what to think. I’m popping another xanax.
CFA500 Wrote: ------------------------------------------------------- > OK here’s something else to think about > > FNM and FRE CDS’s settle on OCTOBER 6 (estimated > 500 billion payout) > LEH OCTOBER 10 > WM OCTOBER 23 > > Now are you guys starting to connect the dots? sure the settlements will have a big impact but most of these CDS contracts are hedged, and i have a feeling that CDS outstanding data suffer a lot from double counting
Easy boy. You can really crash if you take too much xanax.
JoeyDVivre Wrote: ------------------------------------------------------- > To address part of it: " why do people keep > thinking the average American is going to suddenly > start defaulting on all his loans?" > > They don’t. But it might happen and if it happens > we would like to keep the disaster as contained as > possible. > > A long time ago, there was an interesting debate > on AF about whether CDS reduced the amount of risk > in capital markets (CDS are supposed to be about > risk transference to people who can take it > better) or whether the sheer volume created new > risk in markets. I was probably in the former > camp, but the latter is looking more like correct. > > > GM has (I dunno, too lazy) $150B worth of bonds > outstanding. What is the total notional size of > CDS traded on GM (I dunno and couldn’t know even > if I wasn’t lazy)? What happens when GM with a > huge negative net worth decides to call it a day > and default? Given the way that the current > debacle has spread, this could be really ugly. I agree that this market is pretty scary, especially when you consider the size of some of these contracts that are put up. But (now remember I’m in no way an expert in this area) don’t these contracts represent zero sum gains in the market place. For example, if one of these firms (US autos) were to go bust the amount of CDS payments that would be paid out would be enormous, but wouldn’t it be confined to one rich HF paying vast sums of $$ to another rich HF? I guess the concern would be that the loser in this transaction couldn’t make the payment and the contra-side (the winner) was depending on that gain as an off-set to another position they held, which would then result in another bust, and on and on the cycle goes. From that I guess the key is for the gov’t to go in and check these funds to make sure they can deliver on their CDS position. If the fund is deemed to have insufficient funds to handle that default, they would have to reduce their exposure to a level the regulators deem appropriate – not to the fund itself.
It’s only zero-sum if everyone pays.
also,i am guessing there is a web of counterparties and all one needs is a weak link.
Dsylexic Wrote: ------------------------------------------------------- > also,i am guessing there is a web of > counterparties and all one needs is a weak link. EXACTLY. It’s true that it is a zero sum game overall. But again the key is: THE DISTRIBUTION OF THESE CONTRACTS. Surely we will see some weak link exposed. Does this have the potential to take down all of the CDS players? I just don’t know. We’ve never seen anything like this EVER. Last big default was Delphi (only $25 million in CDS outstanding)…small peanuts compared to what we are facing today.