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"A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults.
In the event of default the buyer of the CDS receives compensation (usually the face value of the loan), and the seller of the CDS takes possession of the defaulted loan. However, anyone can purchase a CDS, even buyers who do not hold the loan instrument and who have no direct insurable interest in the loan (these are called "naked" CDSs). If there are more CDS contracts outstanding than bonds in existence, a protocol exists to hold a credit event auction; the payment received is usually substantially less than the face value of the loan. The European Parliament has approved a ban on naked CDSs, since 1 December 2011, but the ban only applies to debt for sovereign nations. (Source)
Think of Credit Default Swaps as an insurance policy against bad debt. By paying an insurance company or Pension Fund a small premium, you can insure any bond against default. As the above chart demonstrates, there is no justifiable reason for Insurance Companies and Pension plans to be in the Credit Default business in the first place.
A bond rating is nothing more than a manipulated number by the banksters that own the Bond Service Ratings Industry. Think of a Used Car Salesman giving you his personal guarantee that you are not buying a lemon. Life Insurance is a finely tuned industry. Once risk is identified, the proper premium can be charged to offset that risk.
No Insurable Interest
Insurable Interest is a key component in the insurance industry. That is why they won't let you buy life insurance on your next door neighbor. The assumption is that the risk of loss in other areas offsets any potential financial gain. Not so with Credit Default Swaps. Anyone can buy them for any reason. There is no regulation. Nothing to stop insiders from making a hefty profit on the demise of a company or even country.
In Insurance terms, this is a Moral Hazard.
Case Study #1
"Morgan Stanley is facing a potential three-level credit rating downgrade by Moody's, a move that could lower the firm's rating from A2 to Baa2, the second-lowest investment grade. In February, Moody's put 17 global banks, including Morgan Stanley, on review for potential downgrades. A decision is expected by the end of June.
Morgan Stanley, the only major U.S. financial firm to be warned of a possible three-level cut, has disclosed that it may need to post $9.6 billion in additional collateral to counterparties and certain exchanges and clearing houses if two other ratings agencies were to follow through with such an action. Moody's is the only one of the three major ratings firms to be weighing currently a downgrade of that magnitude." (Source)
In other words, the risk of Morgan Stanley defaulting on its corporate bonds just went from minimal to significant with one stroke of a pen. Credit Default Swaps on Morgan Stanley's debt just turned a huge profit. The higher the risk of default, the more valuable a Credit Default Swap becomes.
Case Study #2
"... companies like AIG weren't just insuring houses. They were also insuring the mortgages on those houses by issuing credit default swaps. By the time AIG was bailed out, it held $440 billion of credit default swaps. AIG's fatal flaw appears to have been applying traditional insurance methods to the CDS market. There is no correlation between traditional insurance events; if your neighbor gets into a car wreck, it doesn't necessarily increase your risk of getting into one. But with bonds, it's a different story: when one defaults, it starts a chain reaction that increases the risk of others going bust. Investors get skittish, worrying that the issues plaguing one big player will affect another. So they start to bail, the markets freak out and lenders pull back credit.
The problem was exacerbated by the fact that so many institutions were tethered to one another through these deals. For example, Lehman Brothers had itself made more than $700 billion worth of swaps, and many of them were backed by AIG. And when mortgage-backed securities started going bad, AIG had to make good on billions of dollars of credit default swaps. Soon it became clear it wasn't going to be able to cover its losses. And since AIG's stock was one of the components of the Dow Jones industrial average, the plunge in its share price pulled down the entire average, contributing to the panic.
The reason the federal government stepped in and bailed out AIG was that the insurer was something of a last backstop in the CDS market. While banks and hedge funds were playing both sides of the CDS business—buying and trading them and thus offsetting whatever losses they took—AIG was simply providing the swaps and holding onto them. Had it been allowed to default, everyone who'd bought a CDS contract from the company would have suffered huge losses in the value of the insurance contracts they had purchased, causing them their own credit problems." (Source)
How Big a Problem?
Total Retirement Assets in the United States are valued at about $17.5 trillion. (Source) The global Credit Default Swaps market has been conservatively valued at 25 trillion dollars. It could be 5 or 100 times that amount. Since there is no regulation or reporting requirements on CDS, no one really knows.
Since Pension Funds and Insurance Companies underwrite the risk, they are on the hook when default happens. In other words, it is more than probable that Insurance Companies and Pensions could transfer every single dollar in their portfolio to CDS holders as the global economy worsens.
European Debt Crisis
"...swaps became a crucial element in the complex negotiations over what amounted to a large-scale writedown by Greece of its government debt in early 2012. As part of Greece’s restructuring, officially described as voluntary, but backed by a new Greek law, bondholders were required to take a 75 percent loss on their holdings." (Source)
The "haircut" meant that swap holders would only receive 25% payouts if Greek debt went into default. Negotiations with swap holders, which are the Global Elite and their Hedge Funds, is one of those things the Banksters don't like discussing with the sheep. Mitt Romney is only one individual that made his fortune at your Pension's expense
Take a Lump Sum Distribution on your retirement and buy physical precious metals. If taxes scare you, email me at firstname.lastname@example.org and I will explain your options. Please include a phone number and best time to reach you.
Liquidate dollar-denominated assets. Take the cash and buy hard commodities that will be required for survival
Buy food, clothes, seeds, firearms and fuel. Then invest the rest in precious metals. Buy silver or gold by emailing email@example.com