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Credit Default Swaps Contracts 'Only' $34.8T

by: Paul Kedrosky October 13, 2008    
Paul Kedrosky

Paul Kedrosky

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The Deposit Trust & Clearing Corporation folks do some weekend working debunking myths about credit default swaps (or, as I like to call them, rodents of unusual size). Among other things, the DTCC says that net Lehman-related CDS fund transfers will be closer to $6-billion than the $250 to $400-billion figures that had been bandied about last week. It also says that less than 1% of the CDS contracts extant are directly mortgage related.

I'm going to come back to both of the above later today, because they actually matter in a longer post I am writing, but I was struck by the following claim:

Reported estimates of the size of the credit default swap market have so far been based on surveys.  These surveys tend to overstate the size of the market due to each party to a trade separately reporting its own side.  Thus, when two parties to a single $10 million dollar trade each report their “side” of the trade, the amount reported is $20 million, which overstates the actual size by a factor of two since both reports relate to a single $10 million contract.  When examining the outstanding amount of actual contracts registered in the Warehouse (not separately reported “sides”) as of October 9, 2008, credit default swap contracts registered in the Warehouse totaled approximately $34.8 trillion (in US Dollar equivalents).  This is down significantly from the approximately $44 trillion that were registered in the Warehouse at the end of April this year.

Whew, only $34.8-trillion! I feel so much better! (I know, I know, it's still only notional,  but let me briefly enjoy the black humor here of someone implicitly calling $34.8-trillion a less worrisome figure.)

More here.

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This article has 3 comments:

  •  
    Oct 13 09:19 AM
    Based on the principle that CDS's should only be written when there is an underlying risk to hedge/manage, the figure should be a small fraction of the 35T. The same goes for many other derivatives. I want to see standardized, exchange-traded derivatives, to stop the Las Vegas casino usage.
    Reply
  •  
    Oct 14 10:14 AM
    "Is It Secret?!?! Is It Safe?!???!"
    GANDALF is appropriately concerned that Frodo Baggins not disclose the whereabouts of "THE RING". If "THE 9" get their hands on the ring, and it is returned to SAURON, than Middle Earth is history.

    Back on regular old Earth, the role of GANDALF is played by Henry Paulson, Ben Bernanke, George Bush, and a host of uber-wealthy autocrats and despots; THE RING is played by 56 Trillion Dollars in worthless "assets": pieces of paper not worth the ink they're written in; THE 9 are played by people 'in the know', whose cries for truth and justice are being muted by those playing GANDALF; SAURON is played by the people of the world.

    I know, I know. In LORD OF THE RINGS, Gandalf is a good guy and Sauron is a bad guy. But just for the sake of the metaphor, pretend the opposite.

    So you see....well, I know it's pretty obvious....but, anyway...

    As long as Spanky Paulson and his cronies (et al) can keep their 50 Trillion Dollar lie a secret from the people, quelling dissent and using deceit and spin and lies to keep the people in line, than they can continue to live the life of luxury and leisure...with the commonfolk as their unwitting slaves. But should the truth become known, than the people will rise up and take over the planet.

    Nice fantasy. As far as I can see---even when the truth DOES come out in the form of massive financial collapse due to 50 Trillion Dollars "worth" of dogshit, the people may not win out after all. You see, in this adaptation of THE LORD OF THE RINGS, Gandalf enlists the support of all of the wizards at his disposal (Saruman, et al) and destroys the people....save for a few billion to keep on in indenture
    Reply
  •  
    Oct 14 03:20 PM
    The amounts involved are gob-smacking. The CDS market was off-the books, non-transparent, and possibly not well understood by the players. A rough parallel may be drawn to re-insurance, a risk-shifting mechanism by insurers like a bookie laying off too much action and done by private treaty. When re-insurance went wrong (AIG, Fireman's Fund, Executive Life) there was a lot of collateral damage. The purchasers of collateralized mortgage paper were by an large institutional fiduciaries and foreign central banks. The rating agencies abetted the transactions by slapping an unrealistic AA or AAA rating. A lot of collateral damage.
    Reply
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