Posted on 09/23/2008 11:09:15 PM PDT by dickmc
On Main Street, insurance protects people from the effects of catastrophes.
But on Wall Street, specialized insurance known as a credit default swaps are turning a bad situation into a catastrophe.
When historians write about the current crisis, much of the blame will go to the slump in the housing and mortgage markets, which triggered the losses, layoffs and liquidations sweeping the financial industry.
But credit default swaps -- complex derivatives originally designed to protect banks from deadbeat borrowers -- are adding to the turmoil. . . .
The rest of the article is here and is well worth reading to better understand the proposed buyout and issues.
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It appears that much of the problem is not the bad debt itself as much as the credit default derivatives which can be many times larger than the debt losses due to the way they were sold multiple times by hedge funds. For an understanding of what these are see Credit default swap in Wikipedia.
It would seem, however, that if the Fed were to simply guarantee the present batch of subprime loans (and based on this analysis at http://www.freerepublic.com/focus/f-chat/2088954/posts which might cost $100 billion in future payments for actual defaults), then the $700 billion problem would seem to go away. (Or perhaps I don't understand all this very well.) (This also based on the assumption that you introduce controls to assure that no more subprimes are added to the mix of future loans. Perhaps you also need something to cancel the current derivatives and prohibit the sale of multiple derivatives on the same loan batch? )
What have I missed, or gone wrong, or misunderstood in the above analysis?
(Excerpt) Read more at reuters.com ...
You win some, you lose some.
That’s the insurance business.
Bingo.
Paulson with our 700 billion is try to establish a market/floor for the crappy subprime loans in order to avoid the catostrophic trigger of credit default swaps bankrupting financial institutions world wide.
Unfortunately, many people (conservatives) don't understand the problem and blithely believe the markets will solve everything. That attitude did not work in 1929 and it likely won't work today.
I’m not market or financial expert by any means, but the more I read about the Credit Default Swaps leads me to believe that there was a lot of fraud taking place. Individuals hedging both ends of the game...one one side providing easy credit to high-risk borrowers knowing they would fail, and then on the other end using the Credit Default Swaps to bet that the mortgages would fail. I know this is simplistic as I explained it, but I could see white collar financial whizzes (with assistance from the mob — Russian or otherwise) playing this game to the hilt. Should I take off my conspiracy hat?
The next big drama we see will be “PRO BULLSHEET BAILOUT BIGGIES” threatening and/or resigning and quiting in >>outrage<<.
In reality what they will be doing is simply, CRYING and POUTING, throwing a tantrum and quite possibly some of them may be getting out of the kill zone, and leaving the country with as much as they can steal and shove into their one piece of luggage.
But they will always be looking over their shoulders for those angry Loan Sharks they left waiting at the EL CASINO DE WALL STREET.
True conservatives know their history. During the 20s the government inflated the currency by something like 2/3s...the bubble had to pop.
Then when it did, the socialists came up with the myth of “excess production” (nevermind that there were plenty of poor and hungry people, until everyone is a trillionaire how can you possibly claim overproduction?), and decided the solution was to throw money around left and right, while torching crops and slaughtering cows and chickens to INCREASE prices.
That’s how you turn a recession into a depression and then into a Great Depression. We haven’t even hit the triggers for a recession, but the socialists/community organizers want to freeze all mortgages, and if they can extend debt “forgiveness” to school & auto loans. Boy I wish I had a 500k mortgage I could never afford, and a fat monthly payment on a new Viper instead of a used car I bought for cash.
Inflation is theft from anyone who saves; a giant tax on anyone who doesn’t live indebted to the max. If we let them, they’ll expand this bailout to give trillions to anyone living above his means, paid for by every one of us who buy what we can afford, pay our bills each month, and have any savings whatsoever.
With the addition of credit cards, car loans and student loans the cost is doubled to 1.4 trillion. and the beat goes on.
KILL THE BULLSHEET BAILOUT
In 2002 we were down 36 percent AND we suffered a terrorist attack ON WALLSTREET.
Today we are down 24 percent. We are still stronger than we were after 9/11. We are still thousands of points higher than after 9/11.
This country has ridden through recessions many times, why should we lose our courage now, and surrender our freedom.
Wallstreet and a Recession are not worse than turning our country into a Socialist State.
Let this recession teach WALLSTREET a lesson with the best teacher =
.......... ................. ............ ..... PAIN.
If we let them, they’ll expand this bailout to give trillions to anyone living above his means, paid for by every one of us who buy what we can afford, pay our bills each month, and have any savings whatsoever.
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Love they way you said that!
CDS fraud would be the most logical explanation for NINJA loans. Offer a $200,000 loan and then place a few $200,000 bets that it will fail. The worse the loan, the better.
In situations where a fraud-minded buyer purchased CDSs from legitimate sellers, bailing out the NINJA loan by buying the property would achieve the most equitable result (since the buyer of the CDSs would get nothing from them). On the other hand, I suspect that in most cases trying to dump in hundreds of billions of dollars would simply feed the corrupt system and make matters worse.
There have been an enormous number of Credit Default Swaps that have already gone bad. If they seek to go after bad debt they will be looking at $5 trillion to $8 trillion easily. These bets were extremely large.
That is the back up plan we need to smash like a baby cockroach.
No, it will be $700 billion.
Paulson needs that amount to funnel the trillions and trillions of toxic debt through. He can't be as "efficient" with a smaller funding vehicle.
Remember, the $700 billion is just a cap "at any one time".
Paulson will buy $700 billion of debt, divide it into $50 billion dollar tranches, sell them to the bond market as 'Aaa' paper, rinse, and repeat. He will move trillions this way and will report to nobody. It will cover all debt including mortgage, credit card, auto loan, and student loan.
bump 4 l8r
As I understand it and the media refuses to report, the banks created CDS to farm out the risk demanded by the libs for the bad loans they had to make.
No tinfoil at all...the Dems set it all up to fail through Freddie and Fannie and blocking legislation to correct it even after Greenspan told them this would happen. You can then safely conclude who is “betting” on the fail.
He didn’t become a billionaire by being stupid, he’s doing what the Rothschilds did in Europe, decades ago...buying when others panicked and sold.
Except from 1994 through 2006, both Houses of Congress were controlled by our party. Yes, I recognize that we lacked the votes to defeat a filibuster in the Senate, but that should not have stopped the House from passing reform legislation and the President from using the bully pulpit to pressure the Senate to act. As conservatives, we often preach the importance of taking responsibility for our own behavior. In this particular situation, our Rebublican representatives in Washington are as guilty as the RATS. No wonder they have a 9% approval rating.
THe real heart of the issue isn’t bailing out the little guys who have mortgages on homes that were overpriced to begin with and now can’t make the payments. Apparently the legislation that provided 300 billion for this has already passed months ago. Now they want us to bail out the folks who bought the risk from the banks and were “so smart” because they got such a great return on their investment for what they “wink wink nod nod” thought was a no risk bet because Uncle Sam would stand behing those loans. Yeah the Repubs didn’t even try to stop this and many got sucked along with the “now everyone can own their own home” (I distinctly remember even Bush saying this early on and yeah Repubs occaisionally get sucked up in the Global warming crapola as well but it was Clinton and the libs that insisted that all the laws that required banks to make these bad loans be made. The banks may have thought they were being pretty shrewd selling these “complicated tools” in getting rid of the risk but what they sold were bets and now the folks who made those bets have lost. Sorry, that is just the way I see it. There should be a lot of nice homes in the Hamptons and great deals on yachts in the near future. Good. I will be damned if I see my good tax dollars going to keep some “Really Smart Guy” in his mansion and yacht and I will join the pitchforks and rope crew to host politicians who think they can pull these shenanigans
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