Reply #24: Okay, the price paid by CDS buyers... [View All]

[JackRiddler]

was paid in real cash, right? They pay like 1 or 2 percent of the total value a year, right? So this cash having been paid exists somewhere... unlike the strictly nominal, in fact totally fantasty value of the actual derivatives. So I'm just thinking, the buyers are being punished for betting right (i.e., for knowing that everything would fail), and... and...

Never mind! Now I'm thinking that I'm thinking too much! Too bad for all those who took out fire insurance policies on other peoples' houses. CDS-type derivatives are the last megabank obligation that needs to be covered from whatever the liquidation brings.

Unfortunately, that's not how it will work. The first Fed strategy will be to pony up another few trillion backed by nothing, and these will be used to cover derivatives payoffs, before the inevitable happens anyway.

Sigh.