U.S. Debt Credit Default Swaps.

From Greg M

U.S. Debt Credit Default Swaps. (Lions… this is what I also covered in my Sunday Markets A Look Ahead Video).

How It Works.

First, a Credit Default Swap (CDS) is a financial contract, its insurance on debt. A buyer pays a premium to a seller (typically a bank) for protection against default or payment disruption, in this case, on U.S. Treasuries. If the U.S. defaults or delays payment, the CDS seller pays out the insured party.

Who Sells the Insurance? Major global banks and financial institutions write CDS contracts. JPMorgan, Goldman Sachs, Citi, Barclays, Deutsche Bank, BNP Paribas, etc. They take on the risk, collecting premiums as long as no default occurs. Why? US debt is supposed to be 100% safe. But its not.

If the U.S. Were to Default: What Happens to the Banks Holding CDS?

1. CDS Contracts Trigger Instantly.

A U.S. default (even technical) would activate credit event clauses in CDS contracts. Banks that sold CDS (insurers) would owe massive payouts, instantly.

2. Unrealized Risk Becomes Real.

Many banks never expected to actually pay on U.S. CDS, just to collect premiums.

These “paper” liabilities now become cash obligations, forcing emergency capital injections or fire sales of assets.

3. Massive Liquidity Crunch

To cover payouts, banks would dump treasuries, stocks, or other high-quality assets, crashing markets across the board. Interbank lending could freeze overnight, just like in 2008, but much worse...

4. Counterparty Contagion

If one big bank can’t pay its CDS obligation, the loss ripples outward.

Counterparties collapse. Derivatives implode. Systemic contagion begins.

5. Emergency Central Bank Intervention.

The Fed and possibly foreign central banks step in with unlimited liquidity (QE on steroids) to prevent total collapse. AND OFFER A SOLUTION. A New System.

6. Global Derivatives Time Bomb Goes Off.

Many CDS contracts are interlinked with other derivatives.

A U.S. default would shake the entire global derivatives market, quad-drillions in exposure suddenly unstable.

If the U.S. defaults, the CDS market becomes a financial nuclear bomb, detonating first at the big banks, and then echoing through every corner of the global financial system.