Coming Soon: The $600 Trillion Derivatives Emergency Meeting (link). The Prudent Investor posted the linked article on SeekingAlpha over the weekend. It's a must-read.
Realizing that by no means is the entire derivatives market at risk, and that a good deal of the notional values of these derivatives net out (theoretically) should give some comfort. But only some. This is still a big problem. Well beyond the ability of any government to "bail-out". Not even all governments acting in unison could hope to bail-out the derivatives-related fallout should systemic failure spread.
Will it spread? I wish I could say no. But, right now, everything is on the table.
One interesting notion I'm hearing discussed more and more, including in the comments on that article, has to do with a purely legal solution to the looming derivatives defaults and unwinding problem. It goes roughly like this:
Default swaps (and related instruments) were unregulated. Those instruments were basically a form of trade-able insurance positions; sometimes used to insure, sometimes to hedge, often to simply speculate -- ie., to bet. Not regulated by financial authorities. Not regulated by insurance authorities. Not regulated by gaming regulators. Therefore, these things constitute a form of illegal gambling. As such, they violate public policy, are not protected by any international treaties or trade agreements, and are subject to nullification by a court. So, just nullify them all. All; every single one. Tell all the parties, "Tough, you should have known better. Be happy we're not going to prosecute you for illegal gambling".
Then, effectively, every party has what they have today, and we move foreward tomorrow. Lot's of upset folks. Lot's of rhetoric about the end of capitalism, the end of markets, the end of credibility. But it will pass quickly. Only a select, elite few ever played in this market to begin with, and they were just running giant bets against one another. So, knock out the hundred trillion or so of default swaps and dependent derivatives and move on to the next crisis -- which is consumer credit defaults.