Enter Cede & Co II; The Fed Is Now Backstopping $25 Trillion In DTCC Cleared Credit Default Swaps

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Wed, 02/10/2010 - 16:42 | 225496 deadhead
deadhead's picture

Perhaps it would be a good idea to share some of this risk with the FDIC??

Wed, 02/10/2010 - 17:14 | 225551 Kitler
Kitler's picture

Looks like they are merely completing their plans to transfer all the risk they created to the citizens of the United States of America through any and all avenues possible.

I'll bet the sheeple are really going to be up in arms about this one... Ha ha ha!!

The downside unfortunately is that if they keep this up there will be nothing left for US to steal.

Wed, 02/10/2010 - 17:32 | 225579 anarkst
anarkst's picture

There's nothing left already.  Balance sheet for the United States of America private/public is (-).  Game over.

Wed, 02/10/2010 - 17:43 | 225601 Kitler
Kitler's picture

You forgot "double or nothing" and "do-overs".

Wed, 02/10/2010 - 18:05 | 225646 Hephasteus
Hephasteus's picture

I'm not broke yet. I still have the full faith and credit of the AMERICAN PEOPLE. Soon be said while dodging bullets.

Wed, 02/10/2010 - 19:23 | 225779 Problem Is
Problem Is's picture

Tax Revolt

All the Sheeple:  "No pay tax. 4 legs good...  Two legs, Blank-dick-fein, Dimon BAAAADDD...


Wed, 02/10/2010 - 18:20 | 225680 inflationary (not verified)
inflationary's picture

yes, this crisis will get much worse. march lows to be rboken. currently reading: http://www.iamned.com

Wed, 02/10/2010 - 18:26 | 225688 Anonymous
Anonymous's picture

spam alert!

Wed, 02/10/2010 - 16:43 | 225498 Bam_Man
Bam_Man's picture

That's pronounced "Seedy & Company", right?

Wed, 02/10/2010 - 16:46 | 225512 J.B. Books
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Pretty much say it all for me...  I'm the middle monkey

J.B. Books

Wed, 02/10/2010 - 16:56 | 225516 Anonymous
Anonymous's picture

"gross notional value of $25.5 trillion. "

Big deal. When are you gloom and doomers gonna come to grips with the fact that Zimbabwe Ben has this all under control? Don't you understand the way Ben rolls by now? He can create $25 trillion quicker than you can say "Weimar Republic".

Besides, all Ben really has to do is threaten to create that $25 trillion out of thin air. The mere suggestion will be enough to send holders of worthless paper worldwide into paroxysms of ecstasy, and thus nip any potential crisis right in the bud. Preferably the day before a quadruple witching Friday. Gotta keep those radical put-option-buyin' enemies of the state honest.

Wed, 02/10/2010 - 17:25 | 225567 Kitler
Kitler's picture

You speak the truth. Ben indeed has everything under control and running according to plan. (Well someones plan!) Is there anyone else better suited to fill in those pesky financial black holes he created with electrons and green ink? Thought not.

Wed, 02/10/2010 - 17:32 | 225580 Missing_Link
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You're right!  How silly of me.  Once you said "Weimar Republic," I remembered how well that experiment ended up.  Nothing bad can possibly happen from this point forward.

Wed, 02/10/2010 - 17:54 | 225624 Oracle of Kypseli
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Can someone please explain why gold price does not punish Ben and Company?

Wed, 02/10/2010 - 18:02 | 225640 SWRichmond
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Because the "gold price" is the price of paper gold contracts traded on CRIMEX / London, which can be settled in paper and not real metal, and we're already seen that an infinite supply of paper is available to those who are fighting to maintain the fiat / bankster regime's power.

Buy physical, take delivery.  When the exchanges run short of real physical metal, then the price of physical and paper gold will start to diverge in a way that can't be ignored.

Wed, 02/10/2010 - 18:10 | 225662 illyia
illyia's picture

Yes, but it's too complicated and political.

The short answer is - it will.

Of course, by then many things won't matter so much.


Wed, 02/10/2010 - 18:01 | 225638 Psquared
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Don't forget, the hyperinflation of the Weimar Republic ended with a currency reset. As Bill Murray would say, "soooo, I got that goin for me."

Wed, 02/10/2010 - 16:59 | 225520 carbonmutant
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Does that make the DTCC more powerful than China?

Wed, 02/10/2010 - 17:04 | 225530 Anonymous
Anonymous's picture

Why would a clearing/trade information house be on the hook in the event of another Lehman implosion?

(The AIG implosion is a poor example, since the US taxpayer ended up paying for that even without this new Information Warehouse).

Wed, 02/10/2010 - 17:04 | 225531 cougar_w
cougar_w's picture

It's a clearing house. How is anyone on the hook for anything? What did I miss? The bigger problem might be maintaining their independence from the FED. We don't want any bubble-blowing in the halls of the DTCC.

Wed, 02/10/2010 - 18:19 | 225678 Assetman
Assetman's picture

Good point... I'm left wondering what I missed as well.

It might imply if JP Morgan in a CDS transaction can't get a counterparty to pay up in the multiple billions, the DTCC can use the Fed as a backstop to "clear" the transaction-- so JPM can book their gain at taxpayer expense.

Of course all this is being done before volatility really starts hitting the fan in the FX and interest rate markets.

The gross notational is a vast exaggeration of what is on the hook.  More likely it is only $2-$4 trillion at risk.  That the new "drop in a bucket".


Wed, 02/10/2010 - 18:38 | 225707 cougar_w
cougar_w's picture

That's an interesting angle; the FED making good on gambling losses. But I guess they did that with GS v-v AIG...

But that was a one-time deal pulled off in a smoke-filled back room while everyone was too busy hand wringing over an anticipated financial meltdown. Surely they could not now institutionalize that as a practice, could they? Wouldn't somebody ... well notice?

Oh ....

Okay maybe we are screwed.


Wed, 02/10/2010 - 21:20 | 226004 Assetman
Assetman's picture

As a consolation, I'll admit I'm really grasping at straws here.  After looking at follow-on comments, I'm not far off from Tyler's interpreation. 

There's some really good refutes, though.

Wed, 02/10/2010 - 17:05 | 225537 trav7777
trav7777's picture

Look...I told the douchebags on TF this and I'll say it here:  if YOU won't borrow, the gov't will do it for you.  CREDIT MUST GROW

Wed, 02/10/2010 - 18:06 | 225650 inflationary (not verified)
inflationary's picture

Big deal, it's not like we was charging for it. The 1979 revolution WILL be rewritten tomorrow, the opposition will storm the parliment or something of that magnitude.

currently reading: http://thenext-crisis.blogspot.com/... this pales in comparison to real crisis!

Wed, 02/10/2010 - 18:35 | 225705 nedwardkelly
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Flag this shit as junk and ban this clowns ass

Wed, 02/10/2010 - 19:08 | 225755 B9K9
B9K9's picture

Trav, you're absolutely correct - Keynes 101: substitute public aggregate demand for private de-leveraging.

There's only one problem - the high water mark for that strategy was 1/19/10. We don't need to have any actual reductions in public spending in order to get the deflationary ball rolling; we only need to see the rate of increase decline.

That's why Nov '10 is going to be such a watershed event. It won't effect anything really radical like ending the Fed, whacking the criminals at GS/MS, et al, but it will achieve one very important distinction: it will be the final nail in fiscal/monetary expansion. So that will be that in terms of re-inflating the bubble.

And if we actually get serious about 'deficit' reduction ie austerity measures, look out debt-deflation tsunami.


Wed, 02/10/2010 - 17:07 | 225539 ShankyS
ShankyS's picture

"And thus socialism was born" it will say in the history books. Hell, if I am not nistaken isn't the DTCC one of the most controvercial and secretive players out there?

Wed, 02/10/2010 - 17:18 | 225558 Anonymouse
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I have dealt with DTCC twice in my career, trying to track down a missing payment to a European investor.  It was a nightmare, as they won't talk to the manager, the trustee, or the investor.  The only person they recognize are the nominees on either side of a transaction, and getting them is a nightmare.

It turns out the mistake was on DTCC's part, but it took about 4 days and 50-60 man-hours to track it down.

So, at least in that sense, they are very secretive

Wed, 02/10/2010 - 20:07 | 225860 Rainman
Rainman's picture

......secrecy is the perfect wedding partner for the Fed. A marriage made in hell.

Wed, 02/10/2010 - 17:07 | 225541 George Washington
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TD:  Great catch... great analysis.

Wed, 02/10/2010 - 17:11 | 225548 RhoRhoRhoBoat
RhoRhoRhoBoat's picture

This post holds no water whatsoever.  There are two massive assumption flaws:

(1) "Simply said, the Federal Reserve is now the guarantor behind all CDS transactions that clear via DTCC"; Any bank or financial institution can become a member of Fed Reserve system.  Your local community bank probably is.  Backstop?  Dont think so.  Backstop here?  Absolutely nothing indicates that.

(2) DTCC can or will blow up, creating the apocalypse: they are not the counterparty to these swaps, only the information processor.  Worst worst worst case scenario? Trade data is unavailable for a few hours.  Kinda like what happens at NYSE every now and then.

Wed, 02/10/2010 - 17:17 | 225556 Tyler Durden
Tyler Durden's picture

Let me explain what holds water: you are Goldman, you have $100 million with AIG as counterparty. AIG fails. You have only collected 50 million in var margin but are owed another 50 million due to intraday valuation shortfall (net/gross equivalency) based on bond prices, etc. Before, you would push for systemic restoration, and taxpayer funding to keep AIG propped up. Now, you don't care, cause the DTCC, via the Fed, will make you whole. Counterparty risk removed.. as it the middleman.

Wed, 02/10/2010 - 17:32 | 225577 Daedal
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"It is expected that in the new company, the Trade Information Warehouse for credit derivatives will become subject to a collaborative global regulatory scheme involving interested regulators in Europe as well as the U.S. The new trust company will also establish a subsidiary in Europe to facilitate the offering of regulated Warehouse services in Europe."


Wed, 02/10/2010 - 17:42 | 225598 Anonymous
Anonymous's picture

I don't agree with this. CDS clearing should work just like the futures exchanges. MTM capital should be posted to Goldman if they are net positive, and debited from AIG if they are net negative. This is the benefit of central clearing.

Wed, 02/10/2010 - 18:51 | 225727 jm
jm's picture

Isn't a central clearing structure what screwed CME's plans?

Wed, 02/10/2010 - 18:34 | 225703 Anonymous
Anonymous's picture

Wrong. DTCC is just an information repository. ICE Trust is the CDS clearinghouse. Been operating for over a year.

Wed, 02/10/2010 - 19:48 | 225822 Anonymous
Anonymous's picture

a little bit more than a repository but not a full blown death star CCP.

Wed, 02/10/2010 - 19:43 | 225809 Anonymous
Anonymous's picture

I think you're confusing the warehouse with a CCP service.

DTCC is offering matching pre-settlement, lifecycle event management and central settlement links to CLS for the cash flows associated with the contract terms and various credit or other events triggering a payment.

These are true OTC's, bi-laterally contracted (or in the case of novation following strict protocols on handling the process) and so DTCC is not "the middleman" between two counterparties. The CCP's (various) are also linking up to leverage the process platform. Margining in any of these CCP's is wholly independent of DTCC. In any true ISDA bi-lateral arrangement it's going to be counterparty to counterparty negotiating disputes. BTW...have you read ISDA's dispute resolution proposals recently? Worth a look.

The point of the DTCC repository is to provide a central place for the Fed or any other regulator to request transaction details. DTCC is simply expanding their service portfolio because they have the infrastructure to do it well and connectivity to the CCP's, CLS, SWIFT etc. It's just smart engineering, not a diabolical plot.

All this ominous overtone stuff isn't helping anyone's argument about other aspects of the OTC market that require attention. The processing efficiency in OTC land was primitive at best before the Fed started banging the table on confirmations in 2005. At that time there was probably 60% uncompared trades greater than 90 days. Think there was no risk there? There have been millions lost due to screw ups on the ops side which btw distorts the portfolio rec's and in turn create collateral calc problems.

Of course the Fed blew past the bigger issues on naked CDS writing etc. That's another angle.

Anyone who works in or has been around the business understands that automation, even in "the back office" is always a plus. Dealers hate electronic matching, transaction reporting, trade repositories etc. These improvements all shed light on the detail and level of business being conducted.

In any case, your premise is factually incorrect so while I share your ire at the excesses and oversights, this is not something to lose sleep over.

Love your work here and have learned a whole lot. In this instance, hope I help inform the debate.

Thu, 02/11/2010 - 00:20 | 226218 calltoaccount
calltoaccount's picture

The DTCC avows neither it nor subs is responsible for actually settling securities trades or enforcing "good delivery" settlement requirements-- even though they assumed the responsibilty from and on behalf of the SEC. ( the establishment of a national system for the prompt and accurate clearance and settlement of transactions in securities”. (Section 17A (a)(2), 1512 U.S.C. 78q-1(a)(2). 

They assumed the responsibility and then simply disowned it. 

Does your interpretation suddenly make them liable for actually settling a securities transaction?  That could certainly put a crimp in the stock counterfeiting profits of their Wall St. financial industry owners.

Wed, 02/10/2010 - 17:47 | 225560 SWRichmond
SWRichmond's picture

Warehouse Trust is to DTCC as AIGFP is to AIG.

Edit: No one wants CDS "regulated", they only want them paid at par without a lot of whining from the taxpayers.

Wed, 02/10/2010 - 17:14 | 225552 Anonymouse
Anonymouse's picture

For a great (fictional) example of how our entire economy is dependent on DTC, read "Debt of Honor" by Tom Clancy.  It has been several years since I read it, but the gist of the plot is that terrorists (or was it some renegade Japanese) introduce a bug in the DTC computers that completely erase all records of shareholders.  It brings the world economy to a halt instantly and creates more chaos than any nuke would.

(spoiler alert)

As a bonus, the book ends with 9/11-like attack on the Capitol during the State of the Union.  It was published in 1994, showing just how prescient Clancy can be.

Wed, 02/10/2010 - 18:20 | 225681 Kitler
Kitler's picture

Problem solved by a 'do-over' as I recall.

Wed, 02/10/2010 - 19:44 | 225812 Anonymous
Anonymous's picture

They never shut down on 9/11.

Thu, 02/11/2010 - 00:06 | 226198 Anonymouse
Anonymouse's picture

That plane went down in PA before it could get there.  Sorry if the whole plane-crashing-into-a-building-just-like-9/11 was too abstract a connection for you

Wed, 02/10/2010 - 17:17 | 225557 Don Smith
Don Smith's picture

Hang on, how is the custodian liable for the counterparty?  Am I missing something?  I can't sue Scottrade if a seller fails to deliver on a trade, can I?  I can't sue the NYSE... I have no recourse in an options trade with the CBOE, do I, if the counterparty fails to deliver?

Wed, 02/10/2010 - 17:36 | 225587 Anonymous
Anonymous's picture

The OCC guarantees all trades done on the CBOE.

Wed, 02/10/2010 - 17:59 | 225630 RhoRhoRhoBoat
RhoRhoRhoBoat's picture


Wed, 02/10/2010 - 18:07 | 225654 jm
jm's picture

The point is that in a (possibly) not so limited set of circumstances, you will not pursue recourse with the counterparty, but with an entity who has potentially assumed the role of insurer to the transaction.

No counterparty will screw the Fed, of course, but the structure enables the Fed some discretion regarding how to deal with counterparties... in extreme distress.  

Wed, 02/10/2010 - 17:33 | 225582 Anonymous
Anonymous's picture

Yeah Tyler you're off here bud. DTCC is a clearing house. If goldman has positive MTM in their favor, there is someone with negative MTM who has been collecting it and posting it to Goldman. Just like futures VM. Don't see the added risk here other than its competing with the CME who would surely be more responsible due to their profit-making nature.

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