Credit Default Swap Round II

Look around everywhere you turn is heartache
It's everywhere that you go
You try everything you can to escape
The pain of life that you know
--Madonna

John Mauldin shares analysis suggesting that, while Euro banks stand to lose big time in the event of sovereign debt defaults in the EU, US financial institutions are likely to fare just as poorly. This is because US institutions have been primary sellers of credit default swaps on EU sovereign debt.

Of the approximate $1.2 trillion in sovereign debt issued by Greece, Ireland, and Portugal, US institutions have indirect exposure via CDS of about $120 billion.

Hopefully you can connect the dots. Big EU bond 'restructurings' (a.k.a. defaults). CDS owners files claims w/ US insurers. US insurers lack capital to cover claims. FDIC steps in. US citizens fund another bailout--this one arguably on foreign soil.

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