For those of us who have been wondering why it is costing us $700 Billion to bail out the banks, when the entire face value of every subprime loan ever sold is probably not much more than that, we really aren't bailing out the subprime loans.

If we were bailing out subprime loans, we could make arrangements with the homeowners to keep their homes, they would pay the banks, and everything would be fine.  I brought this up in this forum a few times, and nobody has yet taken the bait and connected to CDS's.

But the secret that Paulson, Bush and everyone else isn't talking about is that we aren't really bailing out defaulted home loans.  We are bailing out companies who lost money buying and selling these high-risk and highly-leveraged Credit Default Swaps, that barely retained any relationship to the subprime loans they were supposed to be guaranteeing.

By the end of 2007, there were an estimated $45 to $62.2 trillion dollars worth of Credit Default Swap contracts in circulation.  And these contracts presumably were created to protect, maybe, $1.5 trillion in subprime loans.  In fact, many economists conjectured that the reason these subprime mortgages were created was to provide fodder for CDS's.  The subprime loans were the pitbulls in the ring.

In other words, CDS were the poker chips in a high-stakes gambling casino.  And these huge investment banks, and even deposit banks, were becoming addicted to the thrills of the game.

It is now estimated that the major US banks could be $3 trillion in debt for CDS contracts they cannot pay off, and whoever owns these contracts are holding the US economy hostage by demanding their money.

$700 billion might be just the tip of the iceberg compared to what it might take to pay off these gambling debts.

What I want to know (and Paulson and Bush will never tell us), who owns these CDS contracts that have come due, and why are they holding the US economy hostage?  What will it REALLY take to keep them at bay?

by rbruck on 09/25/2008 03:12:03 PM EST