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One thing people do not appreciate is that the vast majority of bank derivatives, if we can believe them and their regulators, are interest rate swaps. In interest rate swaps, as I understand them, the notional value is the size of the underlying loan/bond but the risk is purely in the ratio between the two rates of interest.  That is A agrees to pay B 8% for 3 years on $1B and B agrees to pay A libor rates for 3 years on the same $1B. Notional value is $1billion, actual worst case risk for A is that libor falls to 0 and it pays 8% of $1B for 3 years for nothing.
by rootless2 on Sat Dec 10th, 2011 at 07:33:17 PM EST
[ Parent ]
That is likely why the actual value of $50 trillion notional could be something like $1.75 trillion, on average. It would be less if they were interest rate swaps but, in the case of a default, they would be much more if they were CDSs. The CDSs are the real weapons of mass financial destruction.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 10th, 2011 at 10:32:11 PM EST
[ Parent ]
Over 60% are interest swaps. The other questions then are the value of the collateral and the counterparty netting.  There is a lot not to like in they system, but Bloomberg is providing misdirection.
by rootless2 on Sun Dec 11th, 2011 at 09:41:58 AM EST
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But it does not take so much to do great damage. Morgan Stanley has written about $40 billion in CDS for French banks and that is several times the value of their equity. How many US banks could withstand HAVING to write off 80% of a $40 billion debt? And how likely is it that only two or three banks would be affected?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Dec 11th, 2011 at 11:13:27 AM EST
[ Parent ]
Is that based on the Zero Hedge article? Because I don't really see that as persuasive. What's the counterparty net? Without that and some understanding of the collaterals it's impossible to have even an approximate sense of the exposure.

http://articles.businessinsider.com/2011-10-19/wall_street/30296727_1_morgan-stanley-exposure-french -banks

by rootless2 on Sun Dec 11th, 2011 at 11:26:01 AM EST
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See here.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Mon Dec 12th, 2011 at 09:18:24 AM EST
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