'AIG Moment'

When prices of mortgage securities started falling in 2008, AIG was required to post more collateral to its CDS counterparties. It ran out of cash doing so, and the U.S. government took over the company. If AIG had collapsed, what the banks saw as a hedge of their mortgage portfolios would have disappeared, leading to tens of billions of dollars in losses.

"We could have an AIG moment in Europe," said Peter Tchir, founder of TF Market Advisors, a New York-based research firm that focuses on European credit markets. "Let's say Greece defaults, causing runs on other periphery debt that would trigger collateral requirements from the sellers of CDS, and one or more cannot meet the margin calls. There might be AIGs hiding out there."

Dexia Bailout

The bailout of Dexia SA by Belgium and France last month resembled AIG's rescue. The bank, based in Brussels and Paris, faced 16 billion euros ($22 billion) of new margin calls on Oct. 7 as a result of interest-rate swaps it had sold, Belgian central bank Governor Luc Coene said.

The two countries agreed to aid Dexia on Oct. 9, assuring creditors -- including holders of CDS and other derivatives counterparties -- they would be paid in full, the same way AIG's were after the U.S. takeover. Goldman Sachs and Morgan Stanley were among the lender's biggest trading partners, the New York Times reported on Oct. 23, citing people it didn't identify.

Benoit Gausseron, a spokesman at Dexia in Paris, didn't confirm or deny the newspaper report.

"The risks for the U.S. banks are particularly relevant if their counterparties are European," said Darrell Duffie, a Stanford University finance professor who has written seven books about derivatives. "What if they sold protection to some banks and bought protection from others, and they can't get paid by the ones they bought protection from?"

Counterparty CDS

Banks also buy CDS on their counterparties to hedge against the risk of trading partners going bust, Duffie said. To ensure those claims are paid, the banks may be turning to institutions deemed systemically important, such as JPMorgan, according to Duffie. The bank, the largest in the U.S. by assets, accounts for a quarter of all credit derivatives outstanding in the U.S. banking system, according to OCC data.