Credit default swap (CDS) disclosure hides true financial risk

November 6, 2008 by · 1 Comment
Filed under: Stock Market News 

This is a pretty hard-hitting article and it also comes up short to the extent of the problem.  The article talks of only $33.6 trillion dollars of credit-default swaps (CDS).   According to the Bank of International Settlements said their is $516 trillion dollars of CDS worldwide.  Being that the United State is considered the financial epicenter, I would assume our financial institutions have much more exposure than what this article states.  

The good news is that the media is finally acknowledging the real problem in the credit markets that is impeding normal lending.  Once we admit this fact it will make a difficult choice on what to do.  I don’t think the different national governments will let all banks that are insolvent because of these debt insurance contracts.   They will either monetize all the debt or absolve all these contracts.  Either way, will create a very intriguing economic environment.


The most comprehensive report on unregulated credit-default swaps didn’t disclose bets in the section of the more than $47 trillion market that helped destroy American International Group Inc., once the world’s biggest insurer.

A report by the Depository Trust and Clearing Corp. doesn’t include privately negotiated credit-default swaps that insurers such as AIG, MBIA Inc. and Ambac Financial Group Inc. sold to guarantee securities known as collateralized debt obligations. It includes only a “small fraction” of contracts linked to mortgage securities, according to Andrea Cicione at BNP Paribas SA in London.

New York-based DTCC’s data, released on its Web site Nov. 4, showed a total $33.6 trillion of transactions on governments, companies and asset-backed securities worldwide, based on gross numbers. While designed to ease concerns about the amount of risk banks and investors amassed on borrowers from companies to homeowners, the report may have missed as much as 40 percent of the trades outstanding in the market, Cicione said.

The data are “likely to underestimate the amount of net CDS exposure,” Cicione, who correctly forecast in January that the cost of protecting European companies from default would rise, said in an interview. “A broadening of the coverage to the entire market is what investors really need.”     

Source: Bloomberg


One Response to “Credit default swap (CDS) disclosure hides true financial risk”
  1. Peter L. Griffiths says:

    Banking experts have failed to notice that banks have only one problem and that is defaulting borrowers. Banks would have no problems if every United States citizen including defaulting borrowers were given a housing benefit of say $1500 a year. In the case of defaulting borrowers this $1500 a year could be paid into the lending bank in reduction of the liability. This would restore the self-respect of both the borrowers as well as the banks.

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