Skip to comments.Everything You Wanted to Know About the Credit Crisis But Were Afraid to Ask
Posted on 09/23/2008 6:42:35 PM PDT by politicket
"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 ...
So Stein capitulates. He has written much incoherent trash about the economy and how wonderful it was with cheap credit for everyone. Now he has realized, a bit too late, that cheap credit causes long term problems although I’m still not sure he sees the connection.
I’m at the Economics 101 level. Can someone explain, in layman’s terms what Credit Default Swaps and derivatives are?
I am still confused about CDS. Is this same concept, let’s say, a collection agency buying a debt at a discount to go after the debtor?
I got a business degree 20 years ago and I am somewhat confused.
I think it has something to do with buying debt contracts at a discount then getting the annuity at a higher rate.
Yeah, and come to find out — there is nothing to go after. . . . .
Bad swap — and they are crying. They want to undue the swap.
According to Stein the max value of foreclosed mrtgages is 250 billion. The other 450 billion is for whom?
And we're asked to bail these guys out.
A credit default swap resembles an insurance policy, as it can be used by a debt holder to hedge, or insure against a default under the debt instrument. However, because there is no requirement to actually hold any asset or suffer a loss, a credit default swap can also be used for speculative purposes and is not generally considered insurance for regulatory purposes.
I understand now.
Someone take it from here and explain the rest to me. I couldn't follow Ben's explanation.
OK, here’s a question I’ve been afraid to ask. It looks like this crisis has been building for a long time. What are the chances that the TIMING of this crisis was manufactured for most impact against republicans in this election? How would we go about verifying something like that?
Now these greedy high rollers want the taxpayers to bail them out? F'em. I feel sorry for the tens of millions who are going to lose their retirements, but there are also tens of millions of us who are going to have to work until we die because we can't afford to retire. Yet they want to waste untold trillions of dollars of tax money (our money) to bailout the greedy thieves? Hell NO!!
My previous link points out other securities (not mortgage related) that add up to many trillions which we will pay. If anyone thinks 700B is it, I have a really nice tract mansion to sell them.
To directly answer your question, once mortgages were bundled and tranched, a relative few defaulting mortgages can destroy the value of the security because the securities were tranched and priced assuming a lot fewer defaults. House prices would rise forever so the securities got default insurance (now defunct) and fraudulent "AAA" ratings (and subsequent high prices).
Then the buyers of the securities used leverage (cheap short term credit) so when the price went down a little they were forced to sell driving down the price to, in many cases, a dime on the dollar.
Listening to them guys up on the hill today they was tryin’ real hard to explain, theys don’t know how to value them things. And that bein’ why they really don’t know how much $$ they really need.
Least that is how I understood them. Was really kind of frightening to listen too.
The only answer is to outlaw financial derivatives such as Credit Default Swaps retroactively, and nullify them.
If these companies owe so much money on these defaults..who owns the benefit? Somebody wins and somebody looses in a futures market. Unless they were trading them back and forth..then it is fraud.
Derivatives comprise a whole market of different financial instruments. Unlike the commercial banking industry, or the stock market, the derivatives market is "self-regulated" - primarily by the investment banks.
Credit Default Swaps (CDS's) are one segment of the derivatives market (probably making up about 1/15 of the market). Think of CDS's as bets in Las Vegas. There can be winners, losers, and pushes. The CDS market was valued at around $900 million dollars in 2001 (not actual dollars - but the total amount of "bets"). That grew to over $45 Trillion dollars by 2008 (see the problem here...).
A Credit Default Swap is a contract with a buyer and seller. The seller in this case might be an investment bank - and they "sell" asset-backed (could be mortgage) paper to the buyer. The buyer "wins" when the seller defaults, and the buyer gets the spoils.
Now, to make things more complicated - this is an international market and there can by many entities involved in CDS's for a particular tranche (or bucket of money). You have what are know as "counter-parties". These counter-parties can be greatly affected if something "out of the norm" happens to a particular contract.
So, if Paulson rushes in and starts affecting the CDS market you will see an "unwinding" of contracts all of the planet due to the "counter-party" exposure. It will literally implode on itself.
If Paulson doesn't do anything, then the "bets" that are set to go bad will continue to go bad. Liquidity in our market will be gone and we will enter a depression.
Pick your poison - but I opt for the depression because it will be shorter in duration because market forces will "self-cleanse".
The marketplace was doing that nicely before Paulson intervened. The problem with nullification is lots of corporate equity will vanish with the financial shock. So it has to be done slowly and carefully.
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