Solution? Or same speech, different day?

It’s a big market, and growing. Nevertheless, you have to be good at playing “Who’s Your Counterparty.”

New York, London, and Tokyo are replaced by Nashville - Merle Hazard is the new king of country. Moral Merle is tuned to CDOs, LBOs, and over-the-counter derivatives, and often plays at Hamptons hotspots with Arthur Laffer.

Here’s a tasty look at the notional value of the credit default swaps outstanding (*) for the last few years:

The notional value is essentially the par value of the underlying credit. We know there was a heck of a lot of credit being granted during the period, and it also seems that a lot of “insurance” was being written against its potential for default.

Around the same time bankers everywhere were looking over their shoulder if someone asked them how their debt portfolio was doing, everyone and their mother was scrambling for sanity in the rate markets (*):

Of course, there’s an awful lot of speculation buried in those numbers, as well as hedging previous hedges. How it all unwinds is anyone’s guess. Meanwhile, investors are “bracing for more bad bank news”. With banks bantering around numbers in the tens of billions, while exposure is floating around in the tens of trillions, I wonder what investors are actually “bracing” with.

Meanwhile, at least a few analysts are starting to speak out (and keep in mind that sub-prime is only a sliver of the total indebtedness floating around).

* Data taken from the International Swaps and Derivatives Association’s twice yearly dealer surveys.

UPDATE: Just a sliver.