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Monday, September 06, 2010

Nostalgia: 2009: The Case of Credit Derivatives---why the big boys looked white last week

If you click on the post you can review a short article on Credit derivatives from Wikipedia. Pretty heavy stuff. But still this should provide a starting point for an understanding of how large, how leveraged and how much there is at stake in the market for these products---which as far as I can tell is unregulated by anybody---and it is unclear if the big boys even know how much is at stake.

I have asked the famous "Bear Trader" to work up a little article on the subject and he is working on it. He did send me some initial thoughts:

"Publicly traded interest rate derivatives (not including CDS), 12/07, worldwide, per BIS., was $336,187,052,000,000

See attachment. Interest rate derivatives are also daisy chained throughout the financial system and some people besides US mortagees are taking a brutal beating on the LIBOR/(Treasury and Agency) spreads. Not the catastrophic dominoes of the credit default swaps, though, but a LOT more money is involved.

World GDP is about $67 Trillion. OTC CDS are about Notional $58 Trillion. Most CDS are not traded over the counter and I have no real data on the notional value these untraded contracts, but five times the notional value of the OTC contracts seems reasonable to me, or about $300 Trillion more. "

Here is the bottom line: Let's talk in TRILLIONS and not billions---and it just occurs to me that this is why all the pundits look white as a sheet on television. Stay tuned. I will publish the finished thoughts of "Bear Trader" when he finishes.

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