I'd like to add some color on all of the fear mongering that authors have created on the notional value of credit swaps.
Approx 75 % of all credit swaps are interest rate swaps.
Interest rate swaps have been around for a long time.
My 4 dealerships were given an opportunity tp participate in a floor plan interest rate credit swap with JPM.
With our floorplan we have a n agreement of so many basis points over Libor.
At any given time - if we feel a low is in we can lock in for 3-5 years a rate as "fixed" for our floor plans needs.
As we all know the world is awash in money.
There are trillions sloshing around and often oil expoters have a surplus that does not yield much.
Banks as intermediaries can take surplus funds and fix the depositors money at a rate for a certain time period.
The blend a depositor with money and desires a higher rate than the bank offers,with a lendor that would like to lock in a rate for a fixed time period.
In all of these swaps the bank locks in the margin of in my case 175 basis points over Libor .The banks margin is always preserved when it is locked in.
The fear of TBTF is very remote.In our case the commitment from JPM to floor of floorplan needs is already out there.
To lock in the rate is our risk not the banks perspective .
If rates go lower we still pay the locked in rate.
If rates go higher the person with excess funds loses the potential of a higher rate.
Interest rate swaps have been around for a long time and are the majority of all credit default swaps.
The fear mongering of the notional value of the swaps is just that fear mongering.
The credit default swaps that existed on real estate that involved securitized collateralized mortgage backed securities was an unreserved unregulated slice of derivatives that was relatively new and brought to us by the investment banks who were bumping into the locak business of FDIC real banks.
The politicians wanted subprime which the FDIC banks shunned.The investment banks cooked up MBS and made a killing on fees and away went the out of control ship.
That does not mean the vast majority credit swaps is as dangerous as these toxic MBS and the associated credit swap insurance that AIG sold was all part of a corrupt AAA ratings that were bought and paid for and the insurance that was bought and paid for - but not reserved for.
It was a corrupt can of worms made up by investment banks and crooked politicians wanting low cost money for their constituents who had bad credit and no money down = bad plan.
The notional value of interest credit wswaps is admittedly huge.It is huge because thqat is how much money there is sloshing around this global economy.
That does not mean they are crooked or cooked up like Mortgage backed securities were.
JUST RELAX and don't let this continual fear mongering keep us paralysed.
The banking system is now the strength of the Globe.
Good can happen.
Fear monger like this author don't know what they are talking about and should not be given credibility.
Just my opinion on a little known AND LESSOR UNDERSTOOD ASPECT OF GLOBAL BANKING.