Credit Default Swamps

Especially alarming is the large growth in credit default swaps in the US Banking system. This chart from contraryinvestor shows only $16 trillion in exposure, while it is generally estimated (no one really knows) that there are some $60 trillion outstanding worldwide.

Credit default swaps can be understood in one of two ways: as insurance underwritten against the risk of default, or as “naked put options.” In either case, they are sold in order to collect the premium. Wizened traders call this picking up pennies in front of a bulldozer. This strategy, together with "securitization," was a huge source of profit in recent years for the FIRE economy, more important than gaming the markets through inside information.

Unfortunately, the banks and insurance companies that pledged this protection did not have the capital to back up these claims in case of default. That responsibility now falls on you, Mr. and Mrs. Future Taxpayer.