There should be a law!! Betting $4.8 billion on a U.S. default

[sinkingfeeling]

http://money.cnn.com/2011/07/26/news/economy/default_cds_debt_ceiling/

NEW YORK (CNNMoney) -- With its winners and losers, Wall Street is often likened to a big casino for obvious reasons. And even when it comes to a possible U.S. default next week, at least a few financial players are looking to cash in on such a bleak turn of events.

A small camp of investors are betting that the U.S. government will default on its debt, and they're putting $4.8 billion of their chips on the table.

In the event of a default, that's how much financial firms will have to pay out to investors who bought credit default swaps against the U.S. government, according to figures from the Depository Trust and Clearing Corp.

CDS contracts typically have a three-day grace period, he said. Plus, even though 1,037 CDS contracts are currently held against the U.S. government, they all expire at varying deadlines. (CDS contracts typically cover a 5-year period.)


*****************************
Wonder how many TeaBaggers are among the 1037 contract holders.

[Vinca]

1. This is reason enough for Obama to invoke the 14th amendment.

[Maru Kitteh]

8. Absolutely. nt

[leveymg]

2. If this bet pays off, may it become a priority target list for global Predator air strikes.

:nuke:

[AngryAmish]

4. Why?

I am baffled by your response.

If pension fund A has a large holding of US debt and the US defaults, who is going to pay the pensions? Wouldn't it be better to have someone hedging that risk?

You want to kill the people running the pension?

[leveymg]

7. Purely emotional response. But, I'm thinking of warfighting simulations that always

anticipate attacks on currencies and markets as part of hostilities. I'm also thinking back to the hedge fund attacks on currencies and exposed national markets that accompanied the '97 Asia Crisis, and how this triggered the onset of IMF restructuring.

The CDS on Treasuries strikes me as a potential weapon in the arsenal of economic war and unwanted sabotage of markets.

[AngryAmish]

10. What would be the effect if the US t-bill if it was illegal to sell a CDS on it?

Would that make borrowing for the US more expensive or less expensive?

[leveymg]

12. In the long-run, it would cut off an avenue of naked speculation that cost the US Treasury

many billions in the real estate markets when the decision was taken to cover the losses with public money.

Have we learned nothing from Q3 08?

[AngryAmish]

13. My question stands.

[leveymg]

15. I answered it. Naked hedges cost the taxpayer when market losses are covered by Treasury

bailouts, as happened after '08. So, demonstrably, the social cost of allowing CDS on public debt issues is far higher.

The actual long-term value of the T-Bill would be higher, and the system less prone to attacks and abuse, by banning. There's your answer.

[AngryAmish]

16. Your position is that the cost of making good on the current CDS for US t-bills

will be bourn by the US taxpayer?

Interesting. Evidence? If so, wouldn't it make sense to then short the firms selling these CDS?

on edit: Your answer is nonresponsive. You are directed to answer the question.

[leveymg]

18. The cost of a decline in underlying T-Bill values would certainly be bourn by the

taxpayer. Yes. The evidence is what happened to GSEs that were heavily covered by CDS, the bearers of which were bailed out. If there were no bailout or implication of future bailouts, I would have less of a problem with this.

I would certainly have shorted AIG in '07 and early '08, just as I would now short whomever the market maker is for the T-Bill CDS - who is the issuer, by the way?

[AngryAmish]

19. Dunno. Not my industry.

You seem to have forgotten my original question: What would happen to the borrowing costs to the US if we passed a law making these CDS illegal?

(putting to the side that no such law could be enforced)

[leveymg]

20. I used to work on the Floor of the NYSE. Decades ago.

Short-term rise is borrowing costs, long-term the costs would be far lower if the risk of manipulation of the market for T-Bills were reduced.

Anything that can be done to reduce naked hedges and add transparency and regulation to trading and hedges would be a good thing from a public policy standpoint.

[AngryAmish]

22. Ah, an answer.

Well done.

I don't think naked hedges should be outlawed. Liquidity and all that. But transparency and regulation, there we agree my friend.

[banned from Kos]

21. Theoreritically prices would rise

but Dodd-Frank addresses the problem correctly by putting these CDS onto an open exchange.

The trouble in 2008 was that AIG hid all their CDS exposure and was unable to pay counterparties. So don't get rid of them - just make sure capital standards are adequate.

Insurance is needed in a market economy.

[leveymg]

23. T-bIlls are the most widely-held form of "insurance" under the Black-Scholes model.

which accounts for the enormous size of the Repo Market, the manipulated lock-up of which -- fails -- in mid-September '08 led to the death of Lehman Bros, the primary Repo market maker.

So, what we have here is CDS as the premier form of Re-insurance, which are currently unregulated and not publicly traded, as I understand implementation of Dodd-Frank.

Gotta get the goods while the going's hot, or something like that

[banned from Kos]

3. It may be large holders of US Treasuries buying the CDS to hedge

If I had $500 billion in short term Treasuries I might want some insurance too.

[Name removed]

5. Deleted message

Message removed by moderator. Click here to review the message board rules.

[banned from Kos]

6. Should the other 20-30 million FOREX traders be in jail too?

Soros is one of the good guys.

[leveymg]

11. He's a global speculator who happens to have a social conscience.

And, he'll be the first to tell you that.

The global financial markets today are primed for a catastrophic implosion, and CDS and the false assurances of hedges backed by Pangloss value they carry are part of the problem.

[Name removed]

9. Deleted message

Message removed by moderator. Click here to review the message board rules.

[WhiteTara]

14. is Eric Cantor involved in this?

I know he's hoping to make piles of money.

[robinlynne]

17. That's more than 10% of the negoitaitons "on the table'. just take it and apply it to

the debt they're all so worried about, and we're done. just nationalize anything anyone has over let's say 10 million dollars. problem solved.

[unblock]

24. cds contracts are often used to HEDGE something else

if you don't know the entire portfolio, you don't know the strategy or the motivations.