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Some better estimates
Ok, it's not a trillion just a hundred billion or so ...
From someone who (unlike me) knows what he's talking about:
Satyajit Das
The Credit Default Swap Market - Will It Unravel?
March 04, 2008
http://prudentbear.com/index.php/FeaturedCommentaryHome
"If the CDS contracts fail then "hedged" banks are exposed to losses on the underlying credit risk. Recently, one analyst suggested that losses from failure of CDS protection sellers to perform could total between US$33 billion and US$158 billion [Andrea Cicione "Counterparty Risk: A Growing Cause of Concern" (25 January 2008) Credit Portfolio Strategy - BNP Paribas Corporate & Investment Banking. This compares to the around US$110 billion that banks have written off to date. While it may be unlikely that the CDS market will fail entirely it is possible that losses on the hedges will add to the losses that the banks have already incurred.
The CDS market entails complex chains of risk. This is similar to the re-insurance chains that proved so problematic in the case of Lloyds. The CDS markets have certain similarities with the reinsurance markets. The CDS fees like the reinsurance premiums are received up front. In both cases the risks are both potentially significant and "long tail" - they do not emerge immediately and may take some time to be fully quantified. As in the re-insurance market, the long chain of CDS contracts may create unknown concentration risks. Defaults may quickly cause the financial system to become gridlocked as uncertainty about counterparty risks restricts normal trading."
Ok, it's not a trillion just a hundred billion or so ...
From someone who (unlike me) knows what he's talking about:
Satyajit Das
The Credit Default Swap Market - Will It Unravel?
March 04, 2008
http://prudentbear.com/index.php/FeaturedCommentaryHome
"If the CDS contracts fail then "hedged" banks are exposed to losses on the underlying credit risk. Recently, one analyst suggested that losses from failure of CDS protection sellers to perform could total between US$33 billion and US$158 billion [Andrea Cicione "Counterparty Risk: A Growing Cause of Concern" (25 January 2008) Credit Portfolio Strategy - BNP Paribas Corporate & Investment Banking. This compares to the around US$110 billion that banks have written off to date. While it may be unlikely that the CDS market will fail entirely it is possible that losses on the hedges will add to the losses that the banks have already incurred.
The CDS market entails complex chains of risk. This is similar to the re-insurance chains that proved so problematic in the case of Lloyds. The CDS markets have certain similarities with the reinsurance markets. The CDS fees like the reinsurance premiums are received up front. In both cases the risks are both potentially significant and "long tail" - they do not emerge immediately and may take some time to be fully quantified. As in the re-insurance market, the long chain of CDS contracts may create unknown concentration risks. Defaults may quickly cause the financial system to become gridlocked as uncertainty about counterparty risks restricts normal trading."
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