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

[Gar Lipow <gar.lipow@xxxxxxxxx>]

Your explanation is the same as one of the guesses I listed. But for
that to be right holdings would have to be concentrated enough to
mitigate the fear of someone else triggering the value drop.  I'm
wondering if there is actual data out there on this, or if all we have
is guesses, because this is one of things the lack of transparency
everyone talks about conceals.

On Fri, Mar 13, 2009 at 11:07 AM, Max Sawicky <maxbsawicky@xxxxxxxxx> wrote:
> 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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