Posted on 09/23/2008 6:09:50 AM PDT by dennisw
Here s one big part of the answer. First, the alert reader will notice that Ben Stein said many times that the amount of money at risk in the subprime meltdown was just not enough to sink an economy of this size. And I was right...to a point. The amount of subprime that defaulted was at most - after recovery in liquidation - about $250 billion. A huge sum but not enough to torpedo the US economy.
The crisis occurred (to greatly oversimplify) because the financial system allowed entities to place bets on whether or not those mortgages would ever be paid. You didn't have to own a mortgage to make the bets. These bets, called Credit Default Swaps, are complex. But in a nutshell, they allow someone to profit immensely - staggeringly - if large numbers of subprime mortgages are not paid off and go into default.
The profit can be wildly out of proportion to the real amount of defaults, because speculators can push down the price of instruments tied to the subprime mortgages far beyond what the real rates of loss have been. As I said, the profits here can be beyond imagining. (In fact, they can be so large that one might well wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on its collapse...)
These Credit Default Swaps have been written (as insurance is written) as private contracts. There is nil government regulation of them. Who writes these policies? Banks. Investment banks. Insurance companies. They now owe the buyers of these Credit Default Swaps on junk mortgage debt trillions of dollars. It is this liability that is the bottomless pit of liability for the financial institutions of America.
(Excerpt) Read more at finance.yahoo.com ...
YOU REALLY MUST READ THE ENTIRE ARTICLE
Very good explanation of the problems
credibility, once squandered, is hard to reclaim with phrases like “I was right, to a point...”.
Ben wrote an article months ago on this mess and got it wrong in a big way.
So if somebody buys them when their prices have been pushed down, they stand to make quite a profit if they can hold them long enough.
read later
Great article(opinion piece) at the Bloomberg site, Titled “ How the Democrats Created the Financial Crisis: Kevin Hassett;
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_hassett&sid=aSKSoiNbnQY0
Credit Default Swaps. In the words of Dennise Miller, “F’em. Don’t pay ‘em.”
If that kind of financial activity can so adversely affect our society, then it should be illegal.
And he’s wrong again.
Ping for later...
red eye reducing bump
Hey, it’s a gift!
Although I enjoy Mr. Stein as a rule.
The rest were illegal insurance scams. It is exactly the same if I, and 1,000 other people purchase homeowner’s insurance on your home, and then root for it to burn down, (or set it on fire), so we can collect.
Whenever one takes out an insurance policy, there must be an insurable interest. Since the speculators in CDS, did not own the underlying securities, the CDS should be declared invalid, for lack of an insurable interest. If I tried to collect on an insurance policy I took out on a home I did not own, I would not be paid, and might face criminal charges.
Those who bought CDS on securities they do not own, should eat their losses and be thankful they are not prosecuted for insurance fraud.
Geeez- I read that too fast and thought is said
DENNIS MILLER!!!!
A more detailed primer. They have been using billions of dollars to place bets and lost. Now we are expected to cover it.
It can only adversely affect our society when done on a large level. No different than if everyone became a compulsive gambler overnight and let everything ride on “Black”.
Government intrusions into the real economic world are cloaked in an appealing demagogic sophistry which conceals the feral appetites these policies satisfy.
They lift their muzzles from the public trough only to lie.
He like Cramer thinks in hindsight that a bailout of a small piece of the financial crap could have been singled out and the rest made whole. Our coming “diversity recession” might have been led off by giving money away to deadbeats and layabouts but the risk mitigation amnesty extends all the way up the financial empire to the top. Does Ben Stein want to buy a strip mall?
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