Bear's Counterparty Risk?
For example, one article contained by the economist said Bear had exposure of $10 trillion within Interes-Rate Swaps an CDS. They aren't taking the other side on $10 trillion, and are probably just setting up trades between clients. Where is the risk?
Thanks
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The risk lies within the CDS sellers going belly up. The problem lies contained by over leveraging of the derivatives where the writers of these "insurance" items do not hold nearly as enough within reserves.
This is a very definite threat to US financial institutions, and it has begin to unfold with Bear Stearns finishing week. Good Luck
Answers: Well, I may not no any more roughly speaking how all this works than you do. I hold also seen these articles. probably the idiots writing them didn't know too much any, or they would have explained within some detail how they arrived at the 10 trillion. Here is how I think it might hold happened. Party A desires to do an interest rate swap for 2 billion. So Bear enters into the swap next to party A. To compensate some of the risk of that swap Bear enters into another offseting swap near part B for 2 billion, but obviously picks up a fee on both swaps. So very soon we have 4 billion of which Bear is gala to, but with no authentic net exposure except as you would expect if Bear goes belly up. Then someone is out 4 billion. Not a tangible pretty picture. Of course the SEC doesn't give a crap. They are out prosecuting some celebrety for a 2.98 profit on insider trading.
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