drevno

Stress Tests: Where Do CDS Fit In?

Thanks for the explanation.
It looks like some new, better balancing (clearing) mechanism is needed, for clarity and fairness, and to avoid impact on the rest of banking and financing.
This looks a lot like dual bookkeeping by the banks..I thought it was made illegal some time ago!


On May 05 11:29 AM Tom Armistead wrote:

> Credit Default Swaps are in effect insurance against bad debt on
> bonds or other obligations. The notional amount would be the policy
> limit. Because losses are infrequent, a CDS with a notional amount
> of 1,000,000 might only be worth 12,000 at fair market value. <br/>
>
> The 15 trillion would be the total amount of insurance. At one point
> globally notional CDS totalled 65 trillion, more than they total
> of all outstanding corporate debt. Rather than closing the original
> transaction, a party closes their position by buying or selling a
> new opposite position. So net notional amounts seriously overstate
> the total size of the problem - they are "headline" numbers. <br/>
>
> But the 64 billion in my opinion is an overstatement of assets -
> these banks collectively are asserting that they all have unrealized
> gains totalling 64 billion on CDS trading. Checking the OCC figures,
> for the last 8 quarters the banks collectively reported losing 8
> billion per quarter on the average, not consistent with large unrealized
> profits...

Stress Tests: Where Do CDS Fit In?

A question from the interested but uninformed:
what does the $15 trillion 'notional' CDS mean/represent? Is this the world total of mortgages and other loans and commercial debt? Or is it the value of the 'bubble' created by the banks trading derivatives of these?
Thanks.