The next shoe to drop

NEW -> Contingent Buyer Assistance Program
<em>Now think about the size of the notional value of the mountain of all derivative of which 95% are OTC Derivatives: One Quadrillion, one thousand one hundred and forty four trillion.(Source: The Bank for International settlements).</em> - JSMineset.com




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That is $1,144 trillion, or


$1,144,000,000,000,000


Is there anybody who thinks the Fed can fix this if it breaks?
 
The problem with the CDS is complexity and unevenness. The situation (oversimplified) is that A paid B for insurance, then C bought insurance from A, then B bought it from C. If A's insurance wipes out B, then B goes into bankruptcy court, probably putting A into bankruptcy court, in turn putting C into bankruptcy. There are never direct losses to the economy from CDS; one party's loss is another's gain. The issue is divvying up the assets. BUT with everybody in bankruptcy the bankruptcy judge has to do it and because of the cross-defaults basically then entire financial system will end up in one court because to figure out what A has left to pay you have to know what C has left for A which requires what B has for C which requires knowing what A has left. So although the CDS don't produce direct losses to the economy, they produce indirect losses in that a default potentially locks up the entire financial system until the government can sort through all the contract to figure out who gets what. With the complexity of these contracts, that might take forever.
 
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