The roughly $600 trillion market is controlled by a small number of players, concentration that has raised competition concerns in recent years.
As of April 29,2011 the size of the World Wide Credit Default Swap Market has not changed.
Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place.
Derivatives took blame for some of the worst debacles of the financial crisis.
For Wall Street, switching to exchanges would have cut their profits in a lucrative business. “Exchanges are anathema to the dealers,” because the resulting added price disclosure “would lower the profits on each trade they handle, and they would handle many fewer trades,” said Darrell Duffie, a finance professor at Stanford business school.
Clearing is considered important by regulators because it requires parties to a trade to post margin or collateral meant to ensure that each side can absorb losses if the trade moves against them. With derivatives, often little margin was required, allowing risks to pile up. Another issue that emerged with the failure of Lehman Brothers was whether such margin should be held in central clearinghouses. Exchange trading usually involves clearing with margin.
Mr. White says the Dec. 11 financial-reform bill will exempt nearly half of the $600 trillion in outstanding derivatives transactions from clearing requirements
A 600 trillion market is a fantasy there is not that much money on the Planet. The reason why Derivatives are exempt from margin requirements is because requiring banks to post even a 5% margin requirement on all their Derivative contracts would mean the banks would have to find 30 trillion dollars.
The entire World’s GDP is only 60 trillion dollars the banks do not have half the worlds GDP in their vaults. Thats why the margin requirement was dropped
Now lets imagine a situation where the Derivatives market has to pay out 1% of its total value a not unlikely scenario. Lets say that
And topping it all off is that a third aircraft carrier, the CVN 73, is sailing west from the South China seas, potentially with a target next to CVN 76 Ronald Reagan which is the second carrier in the Straits of Hormuz area. Three carriers in proximity to Iran would be extremely troubling,
Three Aircraft Carriers near Iran means we are going to war with Iran what happens then?
Oil prices go through the roof and nations like Iceland, Greece etc start defaulting on their National debt as the world economy slows everyone who bought a Derivative and bet the economy would slow down would want to get paid. Airlines who bought Derivatives as a hedge against higher fuel prices would want to get paid, people who bet grain prices would go up (farmers harvest crops with tractors that run on gas) would want to get paid, Oil burning power plants owners who bought Derivatives as a hedge against higher oil prices would want to get paid.
Now then just how would all these people collect on their Derivatives after all even a 1% pay out of a $600 trillion market is 6 trillion dollars. When the banks have no money saved as collateral in case they have to pay?
Just where will the banks get a little less than half of America’s Total National Debt to make even a 1% payout? Also as the world’s economy slows down banks will have a harder time trying to raising the cash as more businesses go bankrupt, more homes go into foreclosure and more people lose their jobs world wide.
Please explain to me why would anyone then buy a contract to protect themselves from price swings when the banks do not have the money to pay you if things get real bad?
I think thats the real reason the Banks do not want Price Disclosure or the government to look at their books. The Derivatives market is Magic you can’t fly Magically if you look down, you can’t run a Derivatives market if people want to look at the books and ask pesky questions.
Or in other words when you need the money the most the banks are the least able to pay you and not all the Imaginary Accounting in the world will save you then so I ask again why does anyone buy these contracts?.
Imagine a game of poker where the players make bets with chips that are suppose to represent cash but all the players have no money.
As long as the poker game keeps going on everything is fine you can keep reaching for more chips if you run out of money.
The Problem is when one or more people decide to cash in their chips none of the players/bankers have any money in collateral to make those chips good. a 1% pay out is $6 trillion dollars, a 5% payout is $30 trillion the banks have created a market where you can get rich on paper but a market that explodes if even a 1% payout over the money that keeps coming into the market from new Credit Default Swap Buyers and wins vs losses from the normal CDS trading is requested.
Given the losses in the banking Crisis I don’t think that assuming a 1% payout of the total market is impossible.
I respectfully submit this article as part of my resume for the Obama administration as you can tell I am much more qualified than Helicopter Ben at the Federal Reserve, Geithner or Summers:) I can see when the Emperor/Economy has no clothes./S