The CDOs collateral calls, it is counting in trillion!
By Alex Mai at 15 July, 2009, 2:57 pm
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Credit-default swaps — contracts that protect against or speculate on corporate defaults by paying the buyer the face value of a bond or loan if a company fails to meet its debt agreements — ballooned almost 100-fold within seven years to represent about $62 trillion by the end of 2007, according to estimates from the New York-based International Swaps & Derivatives Association.
CDS is like an insurer to protect buyers from losing bond value or loan goes into default. If those $62 trillion has lost 20%-30% or more, CDS is going to pay for those collateral calls, it is $13T ~ $19.5T. It is huge enough to trigger a worse crisis right after this.
Unregulated trading of the contracts made it difficult for the U.S. to assess how connected banks had become following the failure of Lehman Brothers Holdings Inc. in September. Credit markets froze when the New York-based firm, once the fourth- largest U.S. investment bank, collapsed in the world’s biggest bankruptcy.
The one light in this black hole is that the amount of CDS went down 1% last year instead of the 45% annual increase that was taking place before the crash.
The other positive thing is that about 50% of these CDS have a 1-5 year maturity, so we will be off the hook in 1-5 years for at least 50% of them.
The OCC did not list what the terms of the maturity of the other ~50% of CDS at longer maturities of more than 1-5 years is.
“Goldman Trading
Losses on mortgages made to borrowers with poor credit began to soar in 2007, causing credit markets to freeze up and leading to almost $1.5 trillion in writedowns and credit losses at the world’s biggest financial institutions, according to data compiled by Bloomberg.
Goldman Sachs today reported record earnings of $3.44 billion in the second quarter that beat analysts’ estimates as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds.
The record results were driven in large part by trading unregulated over-the-counter derivatives. Revenue from fixed-income, currencies and commodities, the company’s biggest unit, was a record $6.8 billion, compared with $6.56 billion in the first quarter and $2.38 billion in last year’s second quarter. ”
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