Credit Derivative Risks

Excerpts from the Avid’s Live Chat Room…

Market Size and Participants

The ISDA[3] reported in April 2007 that total notional amount on outstanding credit derivatives was $35.1 trillion with a gross market value of $948 billion. Risks involving credit derivatives are a concern among regulators of financial markets.   Several statements have been issued by the US Federal Reserve in the Fall of 2005 about these risks.  They even highlighted the increasing backlog of confirmations for credit derivatives trades. These backlogs present risks to the market (both in theory and in all likelihood), and they exasperate other dangers in the financial system. One difficulty in regulating these and other derivatives is that the populace who know most about these  derivatives  also typically have a vested incentive in encouraging their growth and lack of regulation. (The incentive may be indirect, through not only consulting incentives, but also incentives in keeping the door open for research.) In other words, Debt Derivatives are an unregulated, manipulated by greed Market that is beginning to CRASH.

Humans always revert back to past practices and in the Debt Derivative Crisis now occurring have become MUCH more creative in designing worthless financial instruments in a way to be sold by investment houses to greedy institutions banks, hedge funds, insurance companies, pension funds, and other corporate. This show should be fun to watch as the taxpayer ends up footing the bill.

US Treasurer Paulson’ Last Debt Derivative Calculation before leaving Goldman Sach’s: