'The Next Domino' in the Crash Is the Biggest: Financial Derivatives
Lyndon LaRouche
January 2, 2008 (LPAC)--With ripples from the financial crash already hitting the real U.S. economy and companies, it will only take a rise in corporate debt defaults to 5% from the current 1.4%, to blow up a derivatives market far larger than anything that has crashed so far. This is the $45-50 trillion mass of financial derivatives called credit default swaps (CDS), which have ballooned tenfold in three years, and are called "the next domino" in the crash for early 2008 by one New York financial manager, who says it will be "far more severe" than anything that has happened so far in the mortgage meltdown and otherwise.
Again, banks are in the greatest danger of going under in this potential $45-50 trillion blowup; it is banks--not the "monoline" bond insurance companies already reported in big trouble--which have issued 44% of all CDS, and hedge funds another 22%. Fitch Ratings Agency is already projecting a corporate bond and loan default rate of 4-5% in the first half of 2008--particularly by home builders and commercial real estate companies in the United States and Europe--enough to collapse a large chunk of the CDS bubble.
The financial manager compared the CDS bubble to a huge, brand-new insurance industry whose providers reserve nothing for future losses. "Imagine what will happen if $45 trillion ... experiences an actuarial average of 5% losses, and no one [in the banks] has $2.25 trillion sitting around to foot the bill!"