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While the dominant topic of conversation when discussing margin hikes (or reductions) usually reverts to silver, ES (stocks) and TEN (bonds), what everyone so far is ignoring is the far more critical topic of real margin risk, in the form of roughly $600 trillion in OTC derivatives. The issue is that while the silver market (for example) is tiny by comparison, it is easy to be pushed around, and thus exchanges can easily represent the illusion that they are in control of counterparty risk (after all, that was the whole point of the recent CME essay on why they hiked...

CHICAGO -- The lawsuit filed by the US Securities and Exchange Commission against Goldman Sachs for securities fraud, charging the bank with misrepresenting the way a collateralized debt obligations (CDO) had been formed, has revived public disgust at credit default swaps (CDS), the instrument used to bet against these CDOs. Before the 2008 financial crisis, CDSs were an esoteric product, known only to a restricted number of sophisticated investors and specialized academics. Today, they are a household name, synonymous with unruly speculation, boundless greed, and, ultimately, systemic instability. Indeed, CDSs are blamed as one of the main causes of the...

For those who have been unsettled by gold's corrective weakness in recent days, I've reprinted a reassuring letter below from a friend and longtime subscriber who also happens to be a U.K.-based gold-dealer and metals trader. Andy, as he is known in the Rick’s Picks chat room, is bullish as ever on gold and sees a potential "black swan" bearing down on the financial system in the form of a Chinese derivatives-default. This is a looming catastrophe that we've written about here before, as some of you may recall. The threat surfaced with an announcement by China a couple of...

I have written hundreds of articles documenting that unregulated, speculative derivatives (especially credit default swaps) are a primary cause of the economic crisis. And I have pointed out that (1) the giant banks will make a killing on carbon trading, (2) while the leading scientist crusading against global warming says it won't work, and (3) there is a very high probability of massive fraud and insider trading in the carbon trading markets. Now, Bloomberg notes that the carbon trading scheme will be centered around derivatives: The banks are preparing to do with carbon what they’ve done before: design and market...

Today, President Obama continued to show just how little he understands about the problem. The Obama administration yesterday unveiled a plan to regulate a vast market of exotic financial instruments known as derivatives, which fueled the global economic crisis and wounded some of the biggest names on Wall Street. As the administration's first step to overhaul financial regulations, the proposal calls on Congress to establish rules that would restrict the banks, hedge funds and other investors who trade derivatives on what have been called "dark markets" for their lack of oversight.

10 reasons why Wall Street has absolute power over America's democracy By Paul B. Farrell, MarketWatch Last update: 7:13 p.m. EDT April 20, 2009Comments: 22 ARROYO GRANDE, Calif. (MarketWatch) -- Two mind-numbing fast-paced dramas. Two parallel worlds. One real, one fiction, both deadly. Jack Bauer, mythic hero of "24." Dying from a deadly bio-pathogen leaked from weapons developed by Starkwood, a rogue mercenary army attacking the presidency, hell-bent on taking over America. The other drama in play: "Hank the Hammer" Paulson, iconic Wall Street hero, a Trojan Horse placed inside Washington by Goldman Sachs as Treasury Secretary in control of...

So is that it? Is the downturn over? After bouncing off of 6500, or more than half its peak value, and with Citigroup briefly breaking $1, the Dow Jones Industrial Average has rallied back more than 1200 points. So, is it safe to go back in the water? Best to figure out what went wrong first -- what I like to call a bear-raid extraordinaire.The Dow clearly got a boost from Treasury Secretary Tim Geithner's new and improved plan, announced on Monday, to rid our banks of those nasty toxic assets. The idea is to form a "Public-Private Investment Fund"...

Credit-default-swap traders may need a shorter leash. LIQUIDATION. A GOOD SOAKING. PLENTY OF TEARS. It is real wet out there in the markets. Given all the known big-picture reasons for this drenching, does it makes sense to continue enabling the folks who make and sell umbrellas to force it to rain at will? The people with a stake in umbrella prices who are able to trigger a downpour are the traders who bid up credit-default swaps on individual companies, whether they own their debt or not, and short the stock. In combination, these actions feed signals into the market that...

<p>The U.S. government rescued giant insurer American International Group in part because its collapse would dramatically hurt European banks, a senior Democratic lawmaker said on Thursday.</p> <p>The U.S. government has bailed out AIG three times since Sept. 16 and committed about $180 billion to keep the insurer alive and doing business.</p>

Many months ago, I posted Writer's Strike - Boiled Down. Looking back, I see a series there, where I boil down complicated situations for you all to sip and digest with ease. This Boiled Down post is a multi-part bonanza, studying our Economic Collapse. Part 3? Credit Default Swaps - Boiled Down. Stay with the series to get all the way to the Fed's action to help. Part 1 of this series, Economic Collapse - Boiled Down. Part 1: Housing, focused on the housing market and how a surplus of investors pushed standards lower for home mortgage approval. It was...

"One Wall Street specialty during the boom was repackaging mortgage securities into instruments called collateralized debt obligations, or CDOs, then selling slices of these with varying levels of risk. "For buyers of the slices who wanted to insure against the debt going bad, Wall Street offered another instrument, called credit-default swaps. Naturally, the riskier the debt that such a swap "insured," the more the swap would cost. And this price would go up if default risk appeared to be increasing. This meant an investor of a bearish bent could buy the swaps as a way to bet on bad news...

<p>Forget Bernard Madoff’s $50 billion fraud. The SEC, and the press, should be focused on short-sellers’ attempts to destroy the U.S. banking system, Cramer said.</p> <p>Just in the 12 days leading up to the Nov. 24 Citigroup bailout, short selling accounted for over 49% of the total trading volume in that company’s stock. For JPMorgan Chase , it was 41%. Bank of America : 35%. Goldman Sachs : 40%. Morgan Stanley : 37%. Wachovia : 42%. Wells Fargo : 42%.</p>

"Effectively, there isn't any CDS market now." David Goldman, an old friend and credit strategist turned private investor, still goes through the credit run sheets from the dealers. "The business looks like the window of a Brezhnev-era Soviet butcher shop. Mouldy scraps hanging in the window. Old women lining up at 4am to try and buy credit protection on General Motors (NYSE:GM) . What are reported as trades are really ways to establish prices to satisfy the auditors." For several years, I have been among those calling for thoughtful, prudent, moderate steps for the reform of the credit default swaps...

Federal Reserve Board data show that: _ More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. _ Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. _ Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

Abstract: Five of the world's richest hedge fund managers, including George Soros, the man who the broke the Bank of England, have been called to account by US politicians for their role in the collapse of the global financial system. The quintet – including John Paulson, who made $3.7bn (£2.49bn) last year betting against the US mortgage market – were grilled over their roles in buying unregulated derivatives products, which some politicians believe contributed to the financial markets' meltdown. The men, who each earned more than $1bn each last year, were called to account by Democratic Congressman Henry Waxman, who...

Reforms are defusing the danger in the credit-default swap market. AS THE GLOBAL CREDIT CRISIS GRINDS ON WITHOUT seeming relief, worries grow that a mishap in the once obscure credit-default swap market could trigger an even more lethal financial meltdown. ..... It's easy to understand why credit-default swaps, which have been called financial weapons of mass destruction, can engender hysteria. These quasi-insurance policies allow buyers to insure all manner of debt instruments, including corporate and sovereign-nation bonds, various bond indexes and securitizations, against any credit losses from defaults. Demand for them grew explosively during the past decade's credit boom. According...

INSIGHTSCredit Default Swaps: 'Financial WMDs' By Theodore F. di StefanoE-Commerce Times 10/31/08 5:30 AM PT We are all painfully aware of what is happening on Wall Street. In fact, I think that it might take several years for the stock market to regain the value that it has lost in the past year (approximately 35 percent).No doubt, there is plenty of blame to go around as to who is primarily responsible for this financial debacle. However, most experts agree that a prime candidate for blame is the credit default swap. Credit Default Swaps Explained Michael Greenberger, a former staff member...

Top officials at American International Group Inc. knew of potential problems in valuing derivative contracts long before these risky transactions caused the insurer's shareholders severe pain, according to documents released by congressional investigators. The disclosures come as prospects dimmed this past week for AIG's efforts to quickly sell assets to repay its bulging debt to the government. The derivative-contract problems would have driven AIG into bankruptcy; in the past month, the government has made available to AIG nearly $123 billion in a rescue plan. A federal criminal probe under way since earlier this year is also looking at how candid...

How AIG's Collapse Began a Global Run on the Banks By Porter Stansberry Something very strange is happening in the financial markets. And I can show you what it is and what it means... If September didn't give you enough to worry about, consider what will happen to real estate prices as unemployment grows steadily over the next several months. As bad as things are now, they'll get much worse. They'll get worse for the obvious reason: because more people will default on their mortgages. But they'll also remain depressed for far longer than anyone expects, for a reason most...

Credit default swaps, potentially the next domino to fall in the ongoing financial crisis, are the debt equivalent of naked shorts on stocks, according to the chairman of the Securities and Exchange Commission. In prepared testimony that he will deliver before the Senate Banking Committee this morning, SEC chairman Christopher Cox equated the sale of the unregulated bond derivatives with naked short selling and called on Congress to give his agency authority to regulate the derivatives. "Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS," said Cox. "Whereas a person who owns a...