Credit Derivatives May Lose $250 Billion…?

According to Bill Gross:

“Credit-default swaps are perhaps the most egregious offenders” in today’s banking system, Gross wrote on the company’s Web site today. “Our modern banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever.”

Agreed in theory, but not necessarily in quantity. Based on the prospective notional value of credit default swaps at December 2007 of around $50 trillion, Gross’s estimate would put defaults at around 0.5%. Certainly, a lot of these swaps were hedges against other swaps, but the rate still seems darn low.