Credit Default Swaps: Next Leg of Crisis - Soros

George Soros, the legendary hedge fund manger, is now 78-years-old and as active as a man half his age, using his multi-billion dollar fortune to purse interests in philanthropy, political activism and writing (eight books and dozens of articles/speeches). On Saturday, he released his ninth book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.

He wrote in the Financial Times of London Friday that there are more shoes to drop in the credit crisis if authorities don’t prepare to head them off. One area is credit default swaps:

“Instead of reshuffling regulatory agencies, the authorities ought to prepare for the next shoes to drop …. There is an esoteric financial instrument called credit default swaps. The notional amount of CDS contracts outstanding is roughly $45,000 billion … The market is totally unregulated and those who hold the contracts do not know whether their counterparties have adequately protected themselves. If and when defaults occur, some of the counterparties are likely to prove unable to fulfill their obligations. This prospect hangs over the financial markets like a sword of Damocles that is bound to fall, but only after some defaults have occurred … One possible solution is to establish a clearing house or exchange with a sound capital structure and strict margin requirements to which all existing and future contracts would have to be submitted.”

Comments

[shesac]

Now that we all know what Soros is warning, why doesn't he urge action by those who can do something to stop that "sword of Damocles" from falling! Surely he's listened to -- and I hope HEEDED -- by those who can act before it's too late, though judging from the subprime/housing fiasco I'm afraid it's too late to prevent a credit default swaps fiasco. If only it had a less cumbersome name -- something like "subprime" -- that the pundits could use in bloviating about why you're losing your shirt.

[Moneylender]

The Credit Debt Swaps contracts is over U$ 50 Trillion

[Moneylender]

The Credit Debt Swaps contracts are over U$ 50 trillions.
JPM has the biggest total

[helplessobserver]

And guys, for big banks and investment banks no margin is required when a contract is written. Hedge funds love the CDS, big up front payments with long deferred obligations. If a payment is required simply close the fund and walk away ala BCS.

[Robert Burns]

At least India's Tata Group bought Jaguar before some Equity or hedge fund picked up GM and added Jag to their line of winners. All that was ever had to back these deals up was credit and they started building on debt. Nothing can be built on debt and they'll find this applies to their new found fortunes that have been made through fees. Just wait till their final fee comes due. They've got a year and a half.

[johnthebear]

I wonder how credit default swapes might affect the coming collapse of commercial real estate with the high cost of refinancing on the interest only deals?

Will the REITs have to mark-to-market their over priced office buildings and malls based on higher capitalization rates and associated interest rates, or will they be able to hide that until 2009? How will credit default swaps affect the REITs?

I would appreciate your thoughts.

[elwind45]

Its the default part that is important. Imagine the future if no one defaults. The world is awash in cash to stem potential problems. The swaps are premiums for default insurance protection. No default, no need. The homeowner is not a business and plays by own rules. The real questions is , how many real estate deals are too aweful to save? the homeowner is the key. The other stuff is rich peoples problem.

[no no]

Soros is bored old rich man with time on his hands . He feeds off of all forms of money making scams , no matter what we define them as .
I am willing to bet Soros will set up or have a shell company in the clearinghouse for more profits .
Mr Soros was arrested in Belarus for attempting to interfere with policies and politcal movement in Belarus . He was funneling money to journalist to attempt an overthrow . Perhaps he should register here in this country as well as a foregin agent or economic terrorist who flys around the globe short selling money and closing down business thus jobless = default on mortagage = homelessness .
Gotta love people like Soros .