Credit Default Swaps – Outcome

[FarmersWife]

This question/subject was posted and I’ve not seen a response. Think it’s very important to understand what was projected to happen and what actually DID happen.
“Hi Ilargi,
Nice to read your writing again, appreciating your contribution, thanks.
I have a question: I got the impression when reading TAE in the Fall that you thought a Credit Event/CDS event associated with Greece would likely have a large destabilizing effect (ie: collapse) on the global financial system d/t all in the globally intertangled and layered instruments, fakery, etc.

And yet, as you yourself say here, the CDS credit event went relatively smoothly for the financial elite – at least so far as we can tell. And it went smoothly likely d/t to the tremendous political, as well as financial, power they wield (as per your post’s second paragraph). It ended up being much less of a big deal as far as it’s effects (at least so far) than i think TAE thought would happen.

To my questions:
1. Are the largest financial institutions “holding it together” (for their own benefit) longer than you thought they could?
2. Are they showing even more power to make things go their way than you thought?
3. My TAE-informed impression was that dominant global financial systems would crumble/collapse, but I’m starting to wonder if enough of the big players have enough power and willingness to use it, that they can manipulate things to their own interests – just as they did with the Greek CDS credit event – and go through unscathed or even get wealthier while everyone/everything else collapses. Your thoughts?
Thank you”

[jal]

I’ve noticed your question but did not want to answer prior Ilargi.

MY response will more than likely be different than Ilargi and what you expect.

1. Of course they are holding it together and if they had not changed the rules or ignored the existing rules they would have failed.
Yes, they cheated. Its in their interest to cheat and to keep the system going.

2. They are making things go their way and will continue to do so until a lot more infighting starts among the players. B. Maddoff preyed upon his peers and nothing happened to the financial system.
You can come up with the more recent examples of preying upon each other and there was no failure of the system.

3. Its not a question of power … its a question of collusion.

Ever since 9/11 rules have been made, changed and ignored.
Yesterday is gone.
The 99ers have never been their concerns and now we know it.
They don’t care that we know it.
As long as our cash flow continues we will remain peaceful.

As an example, there was an interview of a couple who are teachers, in Greece, who had their total income cut by 50% and yet with the inflation eating into their remaining income they still don’t see the big picture that is being presented by I&S.

Eventually, there will be a reset because infinite leveraging and exponential growth is unstainable.

If you have been reading TAE and other bloggers then you know that I’ve not told you anything that you did not know.

If you are here then you are a smart frog.

[Bukko Canukko]

Would someone please explain to me whether my basic perception about credit default swaps is wrong? One of the things I like about TAE is that the smart people here can cut to the nut of the truth, stripping away the chaffaganda of illusion.

I thought CDS’s were a cheap way of pretending you had a pile of money. You pay a pittance for “insurance” on that pile of money, so you can say “I own the pile in case someone craps out on paying it.” Then you get to pretend you DO have that much money, and you can borrow against it to speculate. Leverage based on make-believe.

I realize the nuts and bolts of the deals are more complicated, but that’s long been my conception of why the CDS game was played. We haven’t reached the point where banks and speculators can just hold up a paper grocery bag and say “You know what’s in here?!? A BILLION DOLLARS! Trust me on this one. Now let me buy your Greek island and I’ll give you the bag. Just don’t open it.” So we have credit default swaps instead.

That’s why I was not surprised there was no massive collapse when Greece defaulted. That should have triggered CDS’s, and people should have been clamouring for their payoffs. But that only works if people in the financial system are expecting that rules of law apply, that words in contracts mean anything when the rubber cheque hits the road. Since the grifters know it’s all bullshit, they don’t care about the CDS’s not being worth the paper they’re printed on.

(They probably don’t even print those things on paper anyway, do they? More pixel dust, just like everything in the imaginary moneyworld.)

Somebody might be a bit steamed they paid $1,000 of “real” money to get an insurance contract on $1 million of a bond that they never owned in the first place, and they’re out for that $1K. (I know, CDS rates are much higher, like 6 grand on an imaginary million. Big schmeel.) Do the CDS “owners” have to stop pretending they “own” that million that they “insured” when the underlying asset and the CDS craps out? Or can they extend and pretend, do a FASB Rule 157 job on them?

One of you finantellectual geniuses please tell me, is my cynical read of CDS’s barking up the wrong paranoia? There’s so much fakery out there, sometimes my mind leaps ahead of the real fakes when I’m trying to untangle the slippery knots.

[Author]

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