pkscottx

Roubini Was Right

OK, everybody Google "Derivatives."

These are what have the Big Boyz soiling themselves and what they are referring to when they talk about "counterparty risk."

You need to understand several things. They have ZERO underlying real assets. They have HUNDREDS OF TRILLIONS OF DOLLARS (more than the annual GDP of the entire freaking planet) in notional "value". They were COMPLETELY unregulated and as opaque as mud.

Nobody knows for sure how much or who has the liability but ALL the financial institutions have a mountain of this toxic crap shoved under the carpet. THIS is what has them hoarding cash and eyeing each other with distrust.

It was derivatives called credit default swaps (CDS) that made AIG go bankrupt. They "insured" billions of dollars of mortgage backed securities (MBS) without adaquet assets to pay up when the realestate market went bust. POOF!

$700 billion is a drop in the bucket for this amount of liability and won't thaw the credit markets. Either the people who took on the risk go bankrupt or the rest of the world does. (Lest you think I exagerate, please think Iceland or ponder the fact that European governments are now insuring bank deposits that are in some cases triple their annual GDP.)