2007 Collateral Event in OTC Derivatives

[USNTC764]

how much more data do you need to answer the question "what started the financial crisis after the free home giveaways?"

www.ISDA.org (http://www.ISDA.org).

[USNTC764]

are you still looking for data on where the trillions went???

[USNTC764]

read the 2008 Margin report at www.ISDA.org (http://www.ISDA.org).

[BillyBobUSA]

read the 2008 Margin report at www.ISDA.org (http://www.ISDA.org).

After some digging around the site I found it here
http://www.isda.org/c_and_a/pdf/ISDA-Margin-Survey-2008.pdf

Regarding the Credit Default swaps refered to in the report, these are all cases where the CDS was taken out with the instrument/security covered as colateral, am I right?

If so, then where are the statistics for CDS where there is no colateral or no part of the instrument is owned by the buyer of the CDS?

From what I have been reading these far outnumber the CDS where there is colateral due to the CDS seller. Do you know where those stats are reported?

Also, these CDS are private contracts, right? So how much assurance does anyone have that the data is acurate? IS there any level of transparency that one might use to verify the data in this report?

Thank you for posting this and for your time and effort.

Edit: oh yes, and isnt the total estimated amount of CDS valued at around $45 trillion? If so, as this ongoing collapse of the market rolls out, how will anyone pay anyone else toward the end? Seems kind of like a Ponzi scheme where the initial buyers that bail out get their cash but the vast majority later down the chainm of events get an apology.

Edit2: I was lowballing the total estimated CDS value.
From Wikipedia:
By the end of 2007 there were an estimated $45 trillion[12] (http://en.wikipedia.org/wiki/Credit_default_swap#cite_note-11) to $62.2 trillion[13] (http://en.wikipedia.org/wiki/Credit_default_swap#cite_note-12)

This stuff is insane, in my view, but maybe that is because I dont feel like I completely understand it at all.

But I get the impression almost no one does.

[BillyBobUSA]

This also is interesting regarding the passage of the Commodity Futures Modernization Act of 2000
http://en.wikipedia.org/wiki/Credit_default_swap#cite_note-4
Credit Default Swaps were invented in 1997 by a team working for JPMorgan Chase[7][8]. Credit Default Swaps became legal, and illegal to regulate, with the Commodity Futures Modernization Act of 2000. They were introduced and rushed through congress as a companion bill, the last day before the Christmas holiday. It was never debated in the House or the Senate. The bill was 11,000 pages long. Less than a week after it was passed by congress, President Clinton signed it into Public Law (106-554) on December 21, 2000.

[realdeal2010]

The national debt is 10.7 trillion dollars - see http://www.brillig.com/debt_clock/
Our deb it 2/3 of our GDP.
So this means our GDP is 15trillion dollars per year.
So we are saying that the CDS's are worth 45 - 62 trillion or 3 to 4x time the GDP!!
Yeah, right...
I suspect the figure really means that 45- 62 trillion dollars of revenue stream are controlled by leverage of 15 to 33 to one.
This means that by conservative estimates, the REAL VALUE of the payments streams could range anyway from 1.5 trillion to 4 trillion dollars.....

Note : "The value of all outstanding residential mortgages, owed by USA households to purchase residences housing at most 4 families, was US$9.9 trillion as of yearend 2006, and US$10.6 trillion as of midyear 2008

source: http://www.federalreserve.gov/releases/z1/Current/z1r-4.pdf


The FUNNY FIGURES come from factoring in leverage.

After some digging around the site I found it here
http://www.isda.org/c_and_a/pdf/ISDA-Margin-Survey-2008.pdf

Regarding the Credit Default swaps refered to in the report, these are all cases where the CDS was taken out with the instrument/security covered as colateral, am I right?

If so, then where are the statistics for CDS where there is no colateral or no part of the instrument is owned by the buyer of the CDS?

From what I have been reading these far outnumber the CDS where there is colateral due to the CDS seller. Do you know where those stats are reported?

Also, these CDS are private contracts, right? So how much assurance does anyone have that the data is acurate? IS there any level of transparency that one might use to verify the data in this report?

Thank you for posting this and for your time and effort.

Edit: oh yes, and isnt the total estimated amount of CDS valued at around $45 trillion? If so, as this ongoing collapse of the market rolls out, how will anyone pay anyone else toward the end? Seems kind of like a Ponzi scheme where the initial buyers that bail out get their cash but the vast majority later down the chainm of events get an apology.

Edit2: I was lowballing the total estimated CDS value.
From Wikipedia:
By the end of 2007 there were an estimated $45 trillion[12] (http://en.wikipedia.org/wiki/Credit_default_swap#cite_note-11) to $62.2 trillion[13] (http://en.wikipedia.org/wiki/Credit_default_swap#cite_note-12)

This stuff is insane, in my view, but maybe that is because I dont feel like I completely understand it at all.

But I get the impression almost no one does.

[BillyBobUSA]

The national debt is 10.7 trillion dollars - see http://www.brillig.com/debt_clock/
Our deb it 2/3 of our GDP.
So this means our GDP is 15trillion dollars per year.
So we are saying that the CDS's are worth 45 - 62 trillion or 3 to 4x time the GDP!!
Yeah, right...
I suspect the figure really means that 45- 62 trillion dollars of revenue stream are controlled by leverage of 15 to 33 to one.
This means that by conservative estimates, the REAL VALUE of the payments streams could range anyway from 1.5 trillion to 4 trillion dollars.....

Note : "The value of all outstanding residential mortgages, owed by USA households to purchase residences housing at most 4 families, was US$9.9 trillion as of yearend 2006, and US$10.6 trillion as of midyear 2008

source: http://www.federalreserve.gov/releases/z1/Current/z1r-4.pdf


The FUNNY FIGURES come from factoring in leverage.

I dont think so.

Again, I am not a proffessional broker, just an obsessive diletante.

But the Credit Default Swap total is the total nominal value of all CDS contracts in a global market.

And the nominal value is the face value of the contract ie if you took out a CDS on $5 million of a bond, the nominal value of that CDS is $5 million.

If you were paying $5000 for that contract at the end of 6 months, then its gross market value is $5000.

I dont think that these private over the counter contracts have leverage as one might when going long or short on a stock or currency pair. Its more like an insurance plan and why would anyone offer leverage on that?

The real root of the problem seems to be that the various financial houses allowed CDS to be taken out on bonds/securities/whathaveyou that the CDS buyer held no interest in.

That would be like me taking out insurance on some old guy I think is about to die and I have no financial stake in his life. The guy dies, but when I go to collect I find out that the insurance company went bankrupt because 50,000 other opportunists also took out life insurance on the same guy.

I am amazed that these banks issued CDS on securities that the buyer held no interest in, or had no stake in, but they did.

I dont think we have sober people at the wheel anymore.

[USNTC764]

Thanks for posting and keeping this thread going. My main point is that when hundreds of billions are missing/not available, and when Iceland gets $3 billion from IMF solely for "restoring currency reserves", it is indicative of cash moving out of the system. And the volume of collateral delivery in 2007 is in the trillions...with potentially an $800 billion abnormal spike in 2007. the cash didnt leave the system via pensioners, widows, cops, retirees, people in the subsidized housing.

[USNTC764]

And if you had something to do with the recent cash gutting, you should be on public trial in the USA for crimes against our country and its people.

[BillyBobUSA]

And if you had something to do with the recent cash gutting, you should be on public trial in the USA for crimes against our country and its people.


Obviously, you are not trying to pick a fight with me.

:lol:

[USNTC764]

clearinghouse for Credit Default Swaps being talked about today. Do you agree with me now that the cash gutting -- or "trading out" of the globe's currency reserves into others hands -- is attributable to collateral in OTC derivatives in 2007?

[USNTC764]

are you all still wondering why it will "take years" to fix the economy? It's because HUNDREDS OF BILLIONS of dollars and EURO were "traded out" of the global financial system in 2007 during a COLLATERAL SPIKE in OTC Derivatives. Read the 2008 Margin Survey at www. ISDA. org.

Then go read the 1998 Bank for International Settlements document from the Basel meetings.

Then read about the Commodity Act of 2000, signed by Clinton.

Then investigate the flooding of the market via Fed/Fannie of cash due to Community Reinvestment Act.

Then revist the state of Collateral in OTC Derivatives during 2007, and ask yourself why nine months post 2007 our country needed 800 billion to survive.

If Madoff gutted $50 billion, why wouldnt you at least question whether financial terrorists have crippled the globe via what ive referred to above???

The Sons of USNTC dont lie.

[USNTC764]

the US Federal Government wont lay this out for you.

[realdeal2010]

Is this the short selling hedge fund managers like George Soros causing economic terrorism to create fear and loathing in the market so the DOW will drop?



the US Federal Government wont lay this out for you.

[USNTC764]

the idiots keep talking nonsense.

[Long Island Bob]

read the 2008 Margin report at www.ISDA.org (http://www.ISDA.org).

actually I was reading the2008 midyear report summary
http://www.isda.org/statistics/recent.html#2008mid


"The notional amount outstanding of credit default swaps (CDS) dropped 12 percent to $54.6 trillion in the first half of 2008.. . ..

The notional amount outstanding of credit default swaps (CDS) grew 37 percent to $62.2 in the second half of 2007"

the total value of all US mortgages is about $12 Trillion.

the total value of all Credit default swaps on all loans (miortgage and non mortgage) throughout the entire world was $54.6 trillion at the height.


It MAY be that players in the CDS market borrowed too much and made to manymargin buys but it does not appear that the problemw s "too many CDS's."


I would expect that if US mortgages =$12 G Trillion the all CDS's on all loans (mortgage and otherwise) throughout every country in the world would be waaay more tahn 4-5 times that.

[Long Island Bob]

Now that youmention it the margin report reads ni part

"ISDA estimates that the amount collateral used in connection with over-the-counter derivatives transactions grew from $1.3 to $2.1 trillion during 2007."

Apparently there was $2.1 Trillion in collateral pledged.


But it doesn't say whether that collateral was pledged at 1:1 or 1:30 or 1:100. It doesn't say whether the collaterallized buys were for US CDS's, European CDS's Japanese CDS's etc.

Basically it doesn't say much of anything.

[USNTC764]

look at the delivery tables. not talking about pledging here....look at the delivery....ie, movements of cash between counterparties.

[Jeemie]

Remember the good old days, when you made money in finance by loaning money and receiving it back with interest, or else bought something that appreciated in value?

We went WAY off the tracks when we started making money off of buying and selling pieces of paper, whose "value" could change depending on what someone plugged into a model on the computer.

What does it say about your finance system when it can't distinguish between legitimate economic activity and fantasy?

When financiers talk of "ramping up production" of derivatives like they were making toasters or refrigerators?

[USNTC764]

from Bloomberg today:

AIG had to seek an $85 billion federal loan in September after credit-rating downgrades left the company facing the possibility of more than $10 billion in collateral calls from debt investors who bought credit-default swaps from the insurer. The bailout, which includes handing the government an 80 percent stake (http://bloomberg.com/apps/quote?ticker=AIG%3AUS) in AIG, expanded to about $150 billion in November, partly to fund an entity designed to retire the swap contracts by purchasing the underlying assets from banks.


http://bloomberg.com/apps/news?pid=20601087&sid=a2RRcEZCR4GE&refer=home

[coolhead]

from Bloomberg today:

AIG had to seek an $85 billion federal loan in September after credit-rating downgrades left the company facing the possibility of more than $10 billion in collateral calls from debt investors who bought credit-default swaps from the insurer. The bailout, which includes handing the government an 80 percent stake (http://bloomberg.com/apps/quote?ticker=AIG%3AUS) in AIG, expanded to about $150 billion in November, partly to fund an entity designed to retire the swap contracts by purchasing the underlying assets from banks.




http://bloomberg.com/apps/news?pid=20601087&sid=a2RRcEZCR4GE&refer=home
USNTC just reading the thread and your rally...back and forth what is a basic explanation of what lead to the financial crisis?

[USNTC764]

read my other posts. a massive bubble of hedgable debt (mortgages), giving rise to an opportunity to gut counterparties via collateral tied to corporate debt ratings. read my posts. perhaps you dont understand netting/derivatives/inverse collateral arrangements.

[USNTC764]

also you should be looking for the basic explanation from FBI, SEC and other US Federal Govt entities/personnel...not US citizens who had nothing to do with Credit Default Swaps and collateral arrangements during the past 5 years or so...last time i checked, the FBI is not going to deliver the 2007 collateral transaction detail to me so as to allow me to offer you an explanation.

[BillyBobUSA]

Now that youmention it the margin report reads ni part

"ISDA estimates that the amount collateral used in connection with over-the-counter derivatives transactions grew from $1.3 to $2.1 trillion during 2007."

Apparently there was $2.1 Trillion in collateral pledged.


But it doesn't say whether that collateral was pledged at 1:1 or 1:30 or 1:100. It doesn't say whether the collaterallized buys were for US CDS's, European CDS's Japanese CDS's etc.

Basically it doesn't say much of anything.


Mish's blog explains this in some detail.

http://globaleconomicanalysis.blogspot.com/2008/02/credit-default-swap-tsunami-approaches.html

"Consider GM. The market cap of GM is $15 billion or so. There are about $1 trillion in credit default swaps bet on the success or failure of GM. It is virtually impossible for this to be hedged because there is not $1 trillion in GM bonds available as collateral."


This is because no one needs to own any of what is being 'insured' with CDS.

http://en.wikipedia.org/wiki/Credit_Default_Swap
"The buyer (http://en.wikipedia.org/wiki/Buyer) of a CDS does not need to own (http://en.wikipedia.org/wiki/Own) the underlying security (http://en.wikipedia.org/wiki/Security) or other form of credit exposure (http://en.wikipedia.org/wiki/Credit_risk); in fact the buyer does not even have to suffer a loss (http://en.wikipedia.org/wiki/Loss) from the default (http://en.wikipedia.org/wiki/Default) event.[2] (http://en.wikipedia.org/wiki/Credit_Default_Swap#cite_note-1)[3] (http://en.wikipedia.org/wiki/Credit_Default_Swap#cite_note-2)[4] (http://en.wikipedia.org/wiki/Credit_Default_Swap#cite_note-3) Generally, to purchase insurance the insured is expected to have an insurable interest (http://en.wikipedia.org/wiki/Insurable_interest) such as owning (http://en.wikipedia.org/wiki/Owning) a debt (http://en.wikipedia.org/wiki/Debt)."

This is why brokers like Mike Shedlock refer to CDS as 'bets', because the buyer is betting that the company he is buying 'insurance' on is going to fail and that is all. He does not have to be insuring anything at all.

http://globaleconomicanalysis.blogspot.com/2008/09/thoughts-on-credit-default-swaps.html

"After the Paulson/Fed sponsored shotgun marriage the Bear Stearns CDS collapsed. As with Fannie and Freddie, those betting on the demise of Bear Stearns were correct. Those betting via credit default swaps at the wrong time had their head handed to them. This is just something to keep in mind going forward when attempting to find meaning in various CDS issues."

There are way too many CDS bought on companies when the buyer had no share in the company at stake.

That is like the law allowing people to take out life insurance policies on old people that are about to die. Problem is, from the buyers point of view, when the old guy dies the insurance company goes broke too often because so many people took out life inurance policies on them that the insurance company cant pay.

[USNTC764]

From Lehman Holdings Form 10-K, Fiscal 2007 (Nov. 2007 fiscal year end), "Credit Ratings" section:

At November 30, 2007, counterparties had the right to require us to post additional collateral pursuant to derivative contracts and other secured funding arrangements of approximately $2.4 billion. Additionally, at that date we would have been required to post additional collateral pursuant to such arrangements of approximately $0.1 billion in the event we were to experience a downgrade of our senior debt rating of one notch and a further $4.6 billion in the event we were to experience a downgrade of our senior debt rating of two notches.

[USNTC764]

the extent to which Lehman would have to "trade out" cash (ie, as collateral) to counterparties because of these derivatives was tied -- inversely -- to corp. debt ratings.

[USNTC764]

as the corp debt ratings were hammered in 2007, firms were gutted of liquid assets -- cash -- via collateral calls. see ISDA.org, 2008 Margin Report for the Macro level view of the cash gutting caused by these devices. then ask yourself "What Caused the 2008 Liquidity Shock?"

[USNTC764]

Lehman's "net credit exposure" to derivatives more than doubled in 2007.

[jmb6]

USNTC, I have been following this thread since I joined these boards. When I first joined, I had no idea what you were talking about. Now, I have done some research and I *think* I understand MOST of it now.

Bank A has $x in total assets (collateral). Because of Fractional Reserve Banking, they can "loan out" 10 times that, or 10x.

Bank A acquires Insurance Company B (thanks to the Commodity Futures Modernization Act of 2000). Insurance Company B has $Z in CDS obligations and only $Y in assets.

At the time or their union, the new organization called "BIC" (Bank + insurance Company) has total assets of $X + $Y and their total obligations are $10X + $Z.

So... New formula... ($10X + $Z)/($X + $Y). I assume that $Z is some derivative (no pun intended) of $Y - Although the amount can change based on "Risk" (just like interest rates can change based on risk) - I will assume that $Z = $2Y. For every $Y in assets, there is $2Y in risk. (10X+2Y)/(X+Y)

Plugging along, Banker A says let's push our insurance leverage to the same $10 to 1 ratio as our insurance risks. New formula:

($10X + 10Y)/(X+Y). The risk of X and Y are not even close to being the same. Every time Y falters, it is now effecting "X" because of the incestuous relationships between the two.

For every dollar of "Y" I have to pay out, I now have to pull out $10 from X because it does not reduce my other Y obligations.

Hence, as the **** started hitting the fan Y kept going down. Each of the major financial institutions were guaranteeing each others debt, so, it caused a steamroll of dependencies. Unlike in the past where a run on the banks would effect just the banks who were stampeded this effected anyone who had a guarantee out on them.

The CDS market was the house of cards being propped up by poor assets (mortgaged backed securities) and pulling one out caused the whole thing to topple.

The government and the FED inserting "liquidity" means artificially bumping up "Y" with US Taxpayer $$.

Your question above, is, who is sucking "Y" out of the system. Where is the money going? X and "Y" were assets, some of which were mortgages but certainly not all of it. Why are we spending more money on this problem than the sum of all the mortgages in the United States of America if that is all that is making these banks illiquid? (is that a word?)

Because the CDS market has sucked the life out of the banks. Your calling for a FBI investigation into who is getting $$ from these securities would certianly be telling. Seems like using CDS's to crash the system would be a lot faster way of making money than any other insider trading scheme than I can think of. No collateral to grab and certainly no regulation.

Thanks for your time, and I hope I was not too off base.

[daveNYC]

Seems like using CDS's to crash the system would be a lot faster way of making money than any other insider trading scheme than I can think of. No collateral to grab and certainly no regulation.

Nasty counterparty risk though.

[USNTC764]

Right...just set up an inverse collateral agreement (ie, you have to pay collateral to counterparty as a corp debt rating "notches" down), and wait for your friends in the rating agencies to pound the ratings. this is what happened in 2007. check the "collateral usage" tables in the ISDA reports. Dollars traded out of large counterparties; Euro out of small and medium.

Because these derivatives settle on net, you can grab cash out of the system via Collateral Calls (as ratings are hammered down) via your collateral agreements. then try to settle -- or just walk away -- when your counterparty goes bankrupt and cant settle the remainder.

But to the extent you've gained liquid assets -- cash, US$s or Euro -- as things go into the tank, you've grabbed more CASH than you would be able to otherwise via Bogus IPOs, I-banking fees or any other SOURCE OF LIQUID ASSETS.

USNTC 764 dont lie. We care about our Country, not our jobs, or what people think of us.

[USNTC764]

Let me post it another way.

We've had a major Liquidity Shock that has lasted since last summer. Only amounts in the multiple hundreds of billions could cause such an abrupt stop in business activity, throttling profits, jobs etc.

We know from ISDA that there was an $800 billion spike in collateral use in OTC Derivatives in 2007, relative to 2006 (when collateral was flat). The 2007 spike was 60%.

Where else in the public domain have you viewed a similar level of data that could be the reason that the US Govt signalled an $800 billion need within 9 months of the end of 2007???

Did the gutting that caused the liquidity shock come from:
-widows taking cash
-inner city kids stuffing it in baggy pants
-payments to military personnel
-bonuses to working stiffs in corporate america
-the revenues of Goldman? Morgan? Merrill?
-bonuses taken home during 2007 by VPs of I-banks in NY?
-perhaps the money was taken by Veterans?

Where else is there an economic event in the HUNDREDS of BILLIONS of DOLLARS in 2007?

[USNTC764]

Did you enjoy hearing what AIG did with the bailout money. Not talking about Bonuses.

Referring to the cash paid to Goldman et al, to cover COLLATERAL obligations relating to derivatives.

Basically all the money which is now debt on unborn was needed so that these institutions can make good on their collateral obligations, all created by likely criminal trading away of our national assets.

[USNTC764]

Even Vanderbilt University is getting gutting by collateral calls. and a hospital system....how many more times do you need a moron to say "economic crisis" on Jay Leno to understand what these fools have done to future generations of American citizens????

[BillyBobUSA]

Even Vanderbilt University is getting gutting by collateral calls. and a hospital system....how many more times do you need a moron to say "economic crisis" on Jay Leno to understand what these fools have done to future generations of American citizens????


Well, I am starting to feel very comfortable with mass firing squads working their way down Wall Street these days.

Sort of shoot em all and let the Devil sort them out approach...just to make sure.

/just kidding...mostly.

[jmb6]

Did you enjoy hearing what AIG did with the bailout money. Not talking about Bonuses.

Referring to the cash paid to Goldman et al, to cover COLLATERAL obligations relating to derivatives.

Basically all the money which is now debt on unborn was needed so that these institutions can make good on their collateral obligations, all created by likely criminal trading away of our national assets.

Yeah, where is the Genius Geithner? If this mess was caused by "poor regulations in the financial markets" where are the fixes? What do you recommend, USNTC?

Maybe rules against listing derivatives as capital?
Rules limiting derivatives to only parties who have a direct interest?

I mean, my idea would be no rules no bailouts, but, it is obvious that the US people are getting swindled by these too big to fail claims.

Would smaller banks who did not get bailout money have a lawsuit under the 14th amendment? Equal protection under the law?

[USNTC764]

Where is the FBI? Where is State? Apparently, any level of cash gutting is acceptable today...where are the stories of malfeasance, misfeasance? Criminal acts? where are the lists of OVERT ACTS????

[USNTC764]

Wasnt Tim Tax Cheat Geithner observing the massive spike in Collateral usage as it was occurring during 2007???? Did he enjoy his New Year's 2008 celebration, without even asking himself "why is there a 60%, 800 billion, spike in collateral usage in OTC derivatives in 2007????"

[E7ALR]

Look, the entities selling the credit swaps for premium were hooked on the short term profits from the premiums. They were so hooked that they ignored the writing on the wall that screamed interest rates would eventually begin rising and adjustable rate mortgages would begin defaulting. Don't blame the buyers just because the sellers were willing to take on 30:1 risk just to collect premiums and make production numbers. Where were the risk teams at the firms selling the swaps? Why did our Congress and President allow this to become unregulated back in 2000? Any regular investor knows about Regulation T and how it restricts the common investor from this type of foolishness. Why wasn't a simular hard cap put on these types of investments?

A good comparison is to look at what happenned to the Hedge Fund "Long Term Capital Management" (LTCM) in the late 90s. They were also caught up in a situation where they had sold default swaps, though on a much smaller total scale that went bad when an external event caused defaults in debt instruments. They were derivative traders, selling the what amounted to uncovered derivative calls. And of course, as of March 13 (one week ago), the derivatives market feels that it doesn't need an exposure cap or any regulation at all.

Any review of what happenned to LTCM will also find references to how the bailout managed by the New York Branch of the Federal Reserve was believed to have created "moral risk" which would encourage other financial entities to take excessive risk on the belief that they would be bailed out. You will also find many of the same players today, both firms and individuals, were connected with LTCM in some way.

[BillyBobUSA]

Wasnt Tim Tax Cheat Geithner observing the massive spike in Collateral usage as it was occurring during 2007???? Did he enjoy his New Year's 2008 celebration, without even asking himself "why is there a 60%, 800 billion, spike in collateral usage in OTC derivatives in 2007????"


The apparent answer would be that lots of people figured lots of companies would go under and took out CDSs to try and make a profit off the collapse?

Unfortunately the CDS issuers are now insolvent in so many cases; why would anyone bother getting them today?

[USNTC764]

Goldman reported today: yeah, they were commercial transactions...and of course, Goldman settles Collateral...with CASH.