that is the largest concern in the market right now.
You have these large multi-faceted banks that are taking on more and more swap agreements that are backed by little to zero cash. Look at JPMorgans SEC releases. They have something like 3 billion in swap contracts (or trillion i cant remember) that is being supported by 250 million in cash. A huge chunk of that is in the form of Credit Default Swaps.....
This is a situtaion that is very similar to 1987 where investors would write S&P 500 option puts way out of the money and scoop a simple "easy to earn premium"....well the market crashes and went down 20% overnight, forcing these investors to deliver securities or margin calls....put a lot of people out on the street.
What happens if there is a massive collapse in the corporate bond market. The CDS is a swap geared towrads insurance on corporate bonds......if you own protection, you have to deliver the bond to the other party and you receive cash back.......a funny thing happened earlier in the year when a company declared bankrupcy (it was a BBB rated bond), when it did, instead of collapsing from a price stand point, the bond RALLIED up 18 cents on the dollar from 60 to 78, due to people having to buy the bond and force delivery....talk about a weird stance, you got tits up and your bonds rally....
I am very nervous about the swaps and derivatives market....ask Warren and Charlie how their derivative book fared when they were forced to unwind it...
