CNBC Video - David Beers with Larry Kudlow - July 27, 2011
Read the transcript at CNBC...
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GLOBAL FINANCIAL ARMAGEDDON - If U.S. Is Downgraded By Any Ratings Agency, A Technical Default Occurs And Possibly TRILLIONS In U.S. Sovereign CDS Must Be Honored And Paid - DERIVATIVES NIGHTMARE SCENARIO
The risk that few are discussing is the possible trigger of a 'default credit event' by an S&P (or Moody's) downgrade of the U.S. AAA rating. It is likely that Wall Street, and perhaps even the Fed have written the majority of CDS on the United States and they are probably unhedged given the implicit belief that the U.S. would never allow a default. Since derivatives are unregulated and not traded on an open exchange, no one knows how many billions or possibly trillions of U.S. Sovereign CDS are out there. A downgrade and therefore technical default would be the ultimate Black Swan event, and unleash a financial chaos never before seen.
Financial Armageddon 101.
Ultimately, this is why I doubt we will see a downgrade from either ratings agency despite the Obama debt ceiling deal not even meeting 50% of the target that S&P identified ($4 trillion in deficit reduction) last week as the minimum package for avoidance.
An unhedged Wall Street is certainly praying for this to be the case.
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