Skip to comments.The $55 trillion question[Credit Default Swaps]
Posted on 09/30/2008 1:33:18 PM PDT by BGHater
The financial crisis has put a spotlight on the obscure world of credit default swaps - which trade in a vast, unregulated market that most people haven't heard of and even fewer understand. Will this be the next disaster?
If Hieronymus Bosch were alive today to paint a triptych called "The Garden of Mortgage Delights," we'd recognize most of the characters in the bacchanalia and its hellish aftermath. Looming largest, of course, would be the Luciferian figures of Greed and Excessive Debt. Scurrying throughout would be the Wall Street bankers who turned these burgeoning debts into exotic securities with tangled structures and soporific acronyms - CDO, MBS, ABS - that concealed the dangers within. Needless to say, we'd see the smooth-tongued emissaries of the credit-rating agencies assuring people that assets of lead could indeed be transformed into investments of gold. Finally, somewhere past the feckless Fannie Mae executives and the dozing politicians, one final figure would lurk in the shadows: a hulking and barely recognizable monster known as Credit Default Swaps.
(Excerpt) Read more at money.cnn.com ...
This is why the bailout really needed to be defeated: it did nothing to address the credit default swaps problem.
But perhaps nothing can, short of a depression.
Nobody whines about equity options.
My fingers are aching from the number of times that I've typed this same comment to folks.
Since the underlying nature of fractional reserve banking is leverage, it is extremely important that lenders carefully assess borrower credit risk.
Take away prudent lending policies, and everything built on top of the house of cards is a hair trigger away from financial meltdown.
Like what we are seeing right now.
But the times they don't.....watch out below!
You might try your idea with:
(and I haven't even touched on Europe...or Germany....or...)
Rather than cry ‘fire’, someone needs to explain this in terms people can understand. (That means a 2 minute byte)
If we were able to survive without CDS’ before 2000, why can’t we now? It’s not like going without a microwave or without a TV. Most of us don’t have CDS’s living in our backyard that we have to feed or anything.
If they were created out of nothing, I’m okay with them going back to where they came from.
Any time before three weeks ago.
ESPECIALLY, try and find a message delivered while he was at Goldman Sachs.
How many trucks would it take to carry a trillion dollars in currency?.. (in say, twentys, or even hundreds)
Hell would be frozen over before any appreciable portion of these lawsuits came to fruition resulting in any movement of funds.
Probably an unworkable idea but hey...it sure would be good for the market in the short term.
Remember the MIPS that brought down Enron? Goldman Sachs created it to fool the IRS. The were “Monthly Income Preferred Stock” but all they really were was a way to sell debt to a subsidiary in order to interchangeably turn debt to equity and vice versa, and claim special tax benefits on both sides based on the structure of the subsidiary.
Anyway - that took down Enron. Now we have these CDS. It’s just unbelievable that people can be allowed to “bet” against homeowners and mortgage baskets etc. It’s asking for trouble - sell loans to people with bad credit, then bet against them being able to pay the loan under the guise of selling “insurance”.
Who the hell thinks this crap up?
I think you'd be amazed.
A stack of one trillion 20 dollar bills would weigh more than 50,000 tons.
Assuming that you are using a standard 48 foot box on a tractor-trailer with a cargo capacity of 22 tons, you'd need almost 2500 rigs to haul that load.
I'd opt for a check.
until the company on which the "bet" is made defaults. Then the holder of the swap stands to gain an enormous amount of money and can be expected to try to collect.
That is one part of why they are not as toxic as they seem - they will, most of them, never reach that 5X trillion point of settlement. Not being a player in these esoteric financial instruments leaves most of us with a loss to explain why not, but everyone I have spoken to on this with more knowledge than me says that's true.
The other part is that even when they will need to come to a settlement, most of them are NOT based on toxic sub-prime or otherwise foreclosing mortgages, and therefore even if they settle the underlying original asset values (discounted for risk in the algorithms calculating the swap) - mortgage and or insurance revenues quite frequently - will still hold true most frequently.
Of course if some people WANT to create a depression psychology, knowing that economic expectations share as much value in determining economic behavior as does an actual paycheck, bank account and distance between income and expenses, then if they can be successful in that process, it does not matter what the material values of the economy are, they'll get a depression.
Company A issues a bond.
Company B places a bet that Company A will default on the bond.
Company C takes B's bet and similar bets from lots of other companies.
Company C books enormous profits on the business.
Company A defaults on the Bond.
Company B is rich.
Company C is up the creek.
Very timely article. This dark and dingy market desperately needs a little sunshine.
Devious greedy people who know how to use leverage to term a stupid idea into a bonanze as long as nothing goes wrong too quickly before they can get out with billions in their pockets. The people betting on the downturn were not necessarily the bad actors here. It was the people selling the insurance, knowing they could never pay it, and prices that were way too low.
Company B is rich.
Company C is up the creek.
Or, Company C has taken so many bad bets that it is unable to make good on the claim, and files for bankruptcy. Then:
Company A is up the creek (it must be since it defaulted on the original bond)
Company B is up the creek (no payment possible from C) and
Company C is up the creek also since it's now in bankruptcy from misjudging the level of risk on all the bets it made.