[OPE] The risks in swap defaults

adsl675281@tiscali.nl

"(...) Subprime, or high-risk collateralized mortgage obligations (CMOs), are only the tip of a colossal iceberg of dodgy credits that are beginning to go sour. The next crisis is already beginning in the US$62 trillion market for credit default swaps (CDS). (...)  An estimated $1.2 trillion could be at risk of the nominal $62 trillion in CDOs outstanding, making it far larger than the subprime market. A chain reaction of failures in the CDS market could trigger the next global financial crisis. The market is entirely unregulated, and there are no public records showing whether sellers have the assets to pay out if a bond defaults. (...) The credit-default-swap market has been mainly untested until now. The default rate in January 2002, when the swap market was valued at $1.5 trillion, was 10.7%, according to Moody's Investors Service. But Fitch Ratings reported in July 2007 that 40% of CDS protection sold worldwide was on companies or securities that are rated below investment grade, up from 8% in 2002. (...)"

Complete text: http://www.atimes.com/atimes/Global_Economy/JF12Dj03.html

"So, for example, when car parts maker Delphi went broke in 2005, the credit default swaps on the company's debt exceeded the value of the underlying bonds tenfold. Those who had committed to deliver bonds in the event of default couldn't do so, and an arrangement had to be struck that saw the buyers of protection get US$366.25 for every US$1000 they had bought." http://www.businessspectator.com.au/bs.nsf/Article/Credit-default-swap-vertigo-C3S5W?OpenDocument

Business Spectator moralizes that "The good news is that for every loser in insurance and gambling, there is a winner. The trouble is nobody has any idea about who the losers will be, let alone their ability to withstand the loss." 

But that is obviously not the case, if the losers outnumber the winners, in a game based on fiduciary money staked on the ability to receive real income which doesn't exist yet, but is to be generated in the future. If that real income fails to be generated, then at most you can say is that there were winners "in the past", in the sense that they gained access to resources based on promissory notes which were not warranted by earnings "in the future". But that is obviously a philosophical issue in the present, if the object of trade (or part thereof) itself is simply wiped out and valueless, because there are no earnings, so that the object cannot be distributed to anyone, because it simply doesn't exist anymore.

Generally, Marx presented the substance of economic value as past and present labour-time, but what we are really dealing with here, is the trade - in the present - of future labour-time, i.e. the trade in claims on future labour time. 

Jurriaan

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