Re: [Pen-l] Query: Credit default swaps: what stops a "run on the bank"?

[Max Sawicky <maxbsawicky@xxxxxxxxx>]

I know nothing about CDS's, but in general when you have a lot of a
certain asset that you think is shaky, the act of trying to unload it
can cause its value to drop even further.  So you take a possibly
bigger bath selling than holding.  Similar to the adage, when you owe
somebody $100 you have a creditor.  When you owe them a million, you
have a partner.


On Fri, Mar 13, 2009 at 1:28 PM, Gar Lipow <gar.lipow@xxxxxxxxx> wrote:
> >From what I understand there are 40 trillion dollars in credit default
> swaps out there, 20 trillion of which are callable against AIG.  U.S.
> 2008 GDP was around 14 trillion. So what has prevented a "run on the
> bank"? What has kept all of them from being called?
>
> I'm guessing it has to be some combination of the following
>
> 1) Not all of them have had the conditions under which they can be
> called met, and some of the one that could be called are against
> assets in good enough shape that the asset holder prefers the asset to
> the exercising the option.
>
> 2) The CDSs are concentrated in few  enough hands to exercise
> discretion in calling them - the way a bank with only one depositor
> might be able to avoid a run.
>
> Anyone out there willing to explain this?
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