[dorlomin]

I have been getting myself up to speed on the CDS market recently and am begining to think either I dont understand them or they are the scariest thing I have found since nuclear war. They are hedges against losses, insurence, but they are a totaly unregulated and underfunded insurance. Any big bond issuing company that goes bankrupt or even defaults could trigger a pretty huge and I mean trillion dollar payout in CDS's (so far as I understand it).

Given that hedge funds and investment banks, institutions under huge pressure for capital are big into this market, many of them may not be able to fund the payout. This in itself would trigger any prudent investor getting there cash out and triggering Bear Sterns II. Which if was not caught in time would create a bankruptcy or default that would trigger more CDS payouts.

Either I have completely misread this situation or these are a catastrophy waiting to happen.

[Dreamtwister]

No you're right. It's a ticking time bomb of epic proportions, and you are right to be scared.

[fireplaceguy]

You're right to be scared. The total derivatives exposure (over half a quadrillion dollars) is more than enough to erase this year's GDP in every country with exposure!

The banksters are slowly figuring out how to wiggle out of it, though. Every time you see a questionable action like last weekends Bear Sterns/JPMChase "merger" funded by the FED you can safely bet that the party and counterparty to large credit default swaps just joined hands to cancel out the exposure. (Offsetting bets held by one entity equal no possibility of loss.)

It's inflationary on a truly grand scale, as we're just beginning to see.