Are there really $64 trillion of bad mortgages out there?

Question/Comment: You mentioned in your report that there are $64 trillion in CD swaps out there. AIG only had a few hundred billion. Who has the rest? Are there really $64 trillion of bad mortgages out there?

Paul Solman: Good questions, but before I answer them, an update. The current number for the total of credit default swaps out there seems to be around $55 trillion. A trillion here, a trillion there and you’re talking about a real difference.

Okay, who has written all the swaps and is on the hook for the insurance they represent? Well, AIG alone had half-a-trillion, now presumably owned by the people of the United States. You only need another hundred or so financial institutions with AIG-sized CDS portfolios and you’ve got your total. I read recently, I think, that one U.S. bank had more than $1 trillion’s-worth in an off-balance sheet account. It wouldn’t take too many of those to get to 55.

To your second question: it’s NOT JUST MORTGAGE–BACKED SECURITIES that are insured. As I suggested last night, credit default swap insurance can and was issued on corporate debt, government debt, ANY debt. I saw an estimate of $300 trillion dollars in world debt outstanding. The U.S. alone has a national debt of nearly $10 trillion.

But beyond that, you can write an INFINITE amount of insurance if you want to. Suppose I insure my life for $100 million dollars. Not to sell myself short or anything, but as long as I am willing to pay the premiums, and the insurance issuer is willing to take them for a $100-million-dollar policy, it doesn’t matter if, on the open market, my life isn’t worth a dime.