The biggest banks have pledged “collateral” — often your deposits — as “security” on those derivatives bets

It allowed derivatives to become commodities that could be traded in their own right. The financial sector called it the Midas Formula and saw it as a recipe for making everything turn to gold. But the markets forgot how the story of King Midas ended.  http://www.theguardian.com/science/2012/feb/12/black-scholes-equation-credit-crunch
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Credit default swaps (CDS) are the most widely traded form of credit derivative.  CDS are bets between two parties on whether or not a company will default on its bonds.  In a typical default swap, the “protection buyer” gets a large payoff from the “protection seller” if the company defaults within a certain period of time, while the “protection seller” collects periodic payments from the “protection buyer” for assuming the risk of default.  CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market change….

In an article on FinancialSense.com on September 9, (2008) Daniel Amerman maintains that the government’s takeover of Fannie Mae and Freddie Mac was not actually a bailout of the mortgage giants.  It was a bailout of the financial derivatives industry     -Ellen Brown, 2008    http://www.webofdebt.com/articles/its_the_derivatives.php
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Love of course is the most creative and ingenious element of God’s heart, for love seeks and finds many ways to comfort, to uplift, to instruct and to rebuke.   -Morya:  12-29-1985 at Camelot, Los Angeles via Messenger E C Prophet    
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The big banks are all counterparties to each other on their derivatives bets. They have pledged “collateral” — often, your deposits — as “security” on those derivatives bets. When a bank fails, and is “resolved” under the new, FSB-directed bail-in regime, payouts on those “secured” derivatives bets get priority over paying you back your deposit.
Here at barnabyisright.com, we have recently been looking at the documents going back and forth between the Australian Treasury and the Australian banks. And it is here that we find confirmation of what has been reported by Yves Smith and others.
In the Australian Financial Markets Association (AFMA) 11 January 2013 letter in reply to the Australian Treasury’s September 2012 consultation paper,Strengthening APRA’s Crisis Management Powers,” we see clearly that our banks consider the issue of how derivatives would be handled in a bank bail-in to be “critical”:
Legal certainty around the enforceability of the netting and collateralarrangements in connection with OTC derivatives is critical to the stability of the market.

AFMA, January 2013, page 14

AFMA, January 2013, page 14
In particular, what the banks are concerned with — so much so, they call it a “guiding principle” in their response to Treasury — is ensuring that the implementation of bail-ins in Australia will “include appropriate respect for…collateral rights”, with safeguards to protect their derivatives positions against “destruction of value”:    http://barnabyisright.com/2013/08/08/australian-banks-demand-protection-from-derivatives-losses-under-bailin-plan/
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