David Einhorn's Attack On CDS---$26.5 trillion (gross notional) CDS market is under siege.

.zerohedge ^ | 11/07/2009 13:46 -0500 | Tyler Durden on

[Chgogal]

“As the graphic shows, derivatives account for 1,000% of world GDP, in essence allowing the world to believe fiat money is worth something only courtesy of financial sleight of hand which involved derivatives and securitizations. Yet all those calling for an end to CDS also have to realize that due to CDS intertwined nature, the world fiat system would need to do away with all derivatives (not just CDS), and when you do that you basically eliminate the other hybrid asset classes: securitizations being chief among them. What this would leave us with is a liquidity pyramid which ends with bank loans, which are much more manageable and whose risk can be controlled. It would also leave the world with a fiat currency system, which would lose about 10x of its value overnight, thereby leading to an instantaneous and global unwind of fiat money, and rolling waves of domestically denominated hyperinflation. A spectacular race to the bottom of the asset pyramid. And who will rather commit suicide than see that happen: why the Federal Reserve of course.”

Please tell me that all the world's institutions are not playing Musical Chairs with all this crap floating around? Oh, BTW, when telling me that all is well, you HAVE to MEAN it. : }

[boomstick]

A much fairer remedy would have been to bail out Goldman Sachs at 20 pennies to the dollar instead of 100 pennies to the dollar

That's silly for multiple reasons.

Firstly, there is no legal basis for your 20% number. This is a matter of contract law, not the arbitrary whim of the local mandarins.

Secondly, no one should have been bailed out. This is a matter of constitutionality, not the arbitrary whim of the local mandarins.

Thirdly, I think GS already had more than 20% of the notional value of the contracts in the form of collateral. There were disputes on some additional amount, and in the end the deal called for AIG to take ownership of the securities in exchange for par (some fraction of which had already been paid to GS).

Here's what I think should have happened:

• a) No bailout for AIG. FFS.
• b) AIG files or is taken into conservatorship or receivership.
• c) CDS contracts on AIG trigger. GS collects enough that (they say) they are made whole on their remaining uncollateralized MTM exposure to AIG.
• d) If GS can find another counterparty to sell them protection on the remaining value, good for them. If they can't bad for them.
• e) US taxpayers save a couple hundred yards.

  To be fair, (e) wouldn't actually have happened, as the federales would have found another rathole to throw the money down. *cough* Fannie *cough*

[dennisw]

Firstly, there is no legal basis for your 20% number.......

20% of the original value is what those AIG/GS CDS were worth and that is all the US should have given GS. A settlement of 20 cents on the dollar

But your way is just as good. I have no problem with that...But the real problem is all the GS operatives in the Federal government that were bailing out GS and giving away billions to GS