hmm
"Twenty years ago the Fed would have let Bear Stearns go bust," said Willem Sels, a credit specialist at Dresdner Kleinwort. "Now it is too interlinked to fail."
That's pretty much exactly what you said, Travis.
Can anyone explain what "reinsurance chains" means? And credit default swaps? Good grief, one needs a master's degree just to understand the vocabulary.
Also, aren't derivatives what caused Orange County, CA to go bankrupt way back last century?
"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."~~Alan Greenspan, February 22, 2004
The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions.~~Alan Greenspan, May 2005
"We're not about to go into a situation where (real estate) prices will go down. There is no evidence home prices are going to collapse."~~Alan Greenspan, May 21, 2006
The damage from the subprime market has been largely contained. Fortunately, the financial system and the economy are strong enough to weather this storm.~~Richard Fisher, Federal Reserve Bank of Dallas President, Apr 4, 2007
"All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."~~Fed Chairman Ben Bernanke, May 17, 2007
A “credit default swap” is nothing more than insurance against a borrower going bankrupt (reallly just a guaranty). If I loan you $1,000 and then pay $10 to your Daddy for him to agree to cover the loan if you default, I swapped $10.00 for insurance against the risk of your default. Make it corporations and banks instead of us chickens (and add lots of zwros), and you have “credit default swaps.”
A reinsurance chain is just a series of agreements among insurance companies. If I agree to insure your $300,000 home against fire loss, then get my brother to agree to pick up (or reinsure) $50,000 of the loss if your house burns down, and then my brother gets his girlfriend to agree to pick up $25,000 of his obligation if the house burns down, we have spread around, or diversified, the risk of a fire. Make it corporations and insurance companies instead of us chickens (and add lots of zeros), and you have a “reinsurance chain.”
How about this tongue twister:
The Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund.
And of course, it failed!
http://www.businessweek.com/magazine/content/07_43/b4055001.htm