The Poison in the System

[Crewleader]

Credit Default Swaps
The Poison in the System

By MIKE WHITNEY

In a little more than a decade, Credit Default Swaps (CDS) trading ballooned into a lucrative multi-billion dollar industry which has changed the fundamental character of the financial system and increased systemic risk by many orders of magnitude. CDS, which were originally created to reduce potential losses from defaulting bonds, has turned into a cash cow for the big banks, generating mega-profits. In the case of insurance giant AIG, losses from CDS transactions has already cost the American people $150 billion, and yet, there still has been no serious effort in Congress to ban them once and for all. Even worse, CDS is the root-cause of systemic risk which connects hundreds of financial institutions together in a lethal daisy-chain.

CDS contracts are not cleared on a centralized exchange nor are they government regulated. That means that no one really knows whether issuers of CDS can pay off potential claims or not. It's a Ponzi-insurance racket of the first order. AIG is a good example of a company that gamed the system and then walked away with millions for its efforts. They sold more CDS than they could cover and then -- the debts started piling up around their eyeballs -- they trundled off to the Fed for a multi-billion dollar bailout. Fed chief Bernanke later said that he was furious over the AIG fiasco, but it didn't stop him from shoveling the losses onto the public ledger and making the taxpayer the guarantor for all AIG's bad bets. Keep in mind, that AIG was selling paper that had zero capital backing, an activity is tantamount to counterfeiting. Still, no one has been indicted or prosecuted in the affair. Defrauding clients and then sticking it to Joe sixpack has become de rigueur on Wall Street.

CDS have spider-webbed their way into every corner of the financial system, lashing together banks and other financial institutions in a way that if one defaults the others go down too. This is what's really meant by "too big to fail"; a euphemism which refers to the tangle of counterparty deals which has been allowed to spread -- regardless of the risk -- so that a handful of banksters can rake in obscene profits. CDS has become the bank cartel's golden goose; a no-risk revenue-generating locomotive that accelerates the transfer of public wealth to high-stakes speculators. If it wasn't for the turbo-charged profits from derivatives transactions, many of the banks would have already gone belly up.

http://www.counterpunch.org/whitney05222009.html

[PSPS]

1. The article understates the problem somewhat.

According to yesterday's Bloomberg, the CDS market is far larger than this piddly $150 billion. It amounts to over 500 trillion dollars which, I believe, is more money than exists in the world. And, of course, Timothy Geithner, Obama's stooge at the US Treasury, is perfectly OK with letting this continue as per his marching orders from Goldman Sachs, et. al.

[truedelphi]

7. Thank you for saying this. When I saw the 150 Billion dollar figure, I thought that

I had woken up in an alternate reality (Well, it would be a more pleasant reality, because there would be less debt.)

Like you say 500 trillion is more money than exists!

[Wednesdays]

2. K&R

:kick:

[nichomachus]

3. Let me see if I understand

what they did is basically the same as a bunch of gamblers taking out 100,000 insurance policies on the same $1-million house -- and then wanting to pay off all of them if the house burned down. Since, there's no money to do that, they want the taxpayers to come up with the $100,000,000,000 so the gamblers don't lose their money.

Is it something along those lines?

[DemReadingDU]

4. or maybe

An 'insurance policy' is taken out on 1 large company. Well, the 'policy' is so cheap, an 'insurance policy' is taken out on every company in the country. All gamblers do this. The gamblers have 'policies' on all the companies. Then all the companies go bankrupt. And the gamblers all want to be paid on all those bankrupt companies.

Do you think it could be this bad?



edit for clarification

[nichomachus]

5. This is what it sounds like to me

I had a friend who had a friend who was in this reinsurance of reinsurance business. The guy had so much money he didn't know what to do with it. I didn't know him personally, but I kept asking his friends if they could tell me exactly what it was that he did. Nobody could -- and these people were PhDs, lawyers, etc. They were totally clueless as to what this guy did and how it made so much money for him. I kind of smelled a rat -- and that was quite a few years ago.

[DemReadingDU]

6. Twenty, twenty-five years ago, this was probably legit

Probably was only done by a few gamblers, and everything was done by the law back in the early 80s.

But then de-regulation was done, and Glass Steagall was repealed. And now there is this huge gigantic bubble of derivatives. I've seen an estimate as large as 800 trillion to 1200 trillion. That's 1.2 quadrillion. WOW!

The entire world GDP is what, 62 trillion?
U.S. GDP is appx 14 trillion?

This bubble is going to collapse the world.


;(

[truedelphi]

8. Main thing we need to know, as someone posted over at YouTube:

As someone posted over at youTube - The Powers that Be are making the entire world their sweat shop. No one will be able to have anything - any time there is money earned it will just go up the chain to the top feeders, through the devaluing of the dollar or through taxes to pay off the actions taken by Treasury and the Fed.