Last year's financial crisis, resulting in this year's economic crisis, was supposedly at root due to massive CDS (Credit Default Swap -- or "insurance against bankruptcy of the borrower") derivative problems in the OTC (Over The Counter -- or "unregulated") financial markets. The OTC derivates market is ENORMOUS; it massively dwarfs all of the economies of the world combined.
(Apologies to anyone who already knows and understands this background, but you will appreciate most people do not.)
Now, onto the subject of this missive then, finally...
The linked article discusses the matter that the enormous problems we have experienced, due to the failures in the CDS derivatives market last year, may well only be a prelude to the Big Kahuna, if the numbers are to be believed. Because on investigation, the author established that CDS are only a small proportion of the whole OTC market, and in fact he discovered the biggest sector of that market is actually IRS (Interest Rate Swaps -- or "insurance against adverse changes in interest rates, which would cause significant losses on the part of the insured party and are therefore prudent to insure against"). IRS are actually something like 3/4 of the market, according to his calculations.
Recently there has been significant volatility in the interest rates on many important bond categories, but most significantly in US government Treasury Bonds (long term loans to the US Treasury) and Treasury Notes (shorter term loans to the US Treasury). The IRS contracts are highly sensitive to volatility in the underlying bond values/yields, and are very susceptible to invokation if interest rates go the wrong way even by seemingly trivial amounts. Its not really a big deal that the issuer of the contract ("insurance") will have to pay out, which would of course be fair given they have chosen to take on that risk at the time of issue. No, the real problem comes when the issuer is forced to pay out on the contract to the insured party, but finds that they cannot afford to do so. This is how the dominos were felled in the CDS failure meltdown, taking out Bear Stearns, Lehman, and all the others, and resulting in your worrying you are going to lose your job, if you didn't already.
The author is concerned, and I share his concern now, that the CDS meltdown was BAD, but if the IRS derivatives start to meltdown as well any time, the results would this time be CATASTROPHIC.
This is a very serious issue, that is being shoved under the carpet. (Or under a tarp, if you prefer perhaps.) I can understand why the elite would prefer you didn't know about this, and therefore why they would cover it up as much as possible. However, it is doing us all a massive disservice to pretend you not knowing will somehow safeguard you against the results, if the nightmare should come to pass. If you didn't know a potential problem existed, how could you possibly hope to have prepared against such an eventuality? You can bet whatever you have that the elite are well prepared for whatever happens, and they will in fact not just survive but prosper at the expense of those that have not prepared.
To stick with the program you are in -- to keep your head down and concentrate just on your job, the latest sports scores and celebrity gossip, show no interest in finding out what it going on outside of that limited sphere -- and let the elite just look after your interests on your behalf, seems to me to be a recipe for disaster. They will look after their own interests, yours will be secondary at best. That's just the way it is.
Its time to look out for number, because few other people will look after you.
Friday, 12 June 2009
SO last year. Now, what about NEXT year?
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