Respectfully, that is why they are more toxic than they seem. Derivitives, credit default swaps,....whatever term the bankers use to deceive the public with.....are inocuous as long as their notional values remain notional. The danger comes quickly as a company defaults and makes a demand on the derivitive contract. Like Lehman's Bros. it happend literally in a matter of hours. This caused AIG (largest insurer in the world) to declare their inablility to live up to their agreement (default) to pay Lehmans. That caused the Federal REserve (think about that....the Federal Reserve went in and injected 85 billion dollars in AIG, 20 of which went to Paulsons buddies at Goldman, in order to stop the immediate cascade of failures on Sept 16. That began the meltdown. Now, where in the Federal Reserve Act of 1913 did Mr.Bernanke get authority to 'give' 85 billion to an insurance company? That is not in their charter. He did it anyway, and noone asked the question. Bernanke gave the money because he knew that Sept.16 would have been the date which the economy cascaded into what is referrd to as a meltdown.
The meltdown has been slowed only temporarily. The only way out for Mr.Bernanke is to monitize the debt. There is no other way, except to allow everything to decay to destruction. Sorry to sound so bleak, but it has already started and it cannot be stopped. All debts will be paid, mostly in the currency of pain and loss.
They were caused by writedowns on portfolios of CDOs - very different instruments.
whatever term the bankers use to deceive the public with
Just because you're not clear on the difference between these contracts and structures doesn't mean that anyone intends to deceive anyone in naming them.
"Credit default swap" is a succinct and accurate description of the instrument.
“Derivitives, credit default swaps,....whatever term the bankers use to deceive the public with.....are inocuous as long as their notional values remain notional. The danger comes quickly as a company defaults and makes a demand on the derivitive contract.”
True, I think, but:
Correct me if I am wrong, but I also think that your scenario is only true when the rate of “default” is extremely out of wack with the discounted risk of default that was built into the cost/price of the derivative at origination and such defaults were occurring on a volume/scale among a whole class of those derivatives AT THE SAME TIME; that an entire class was in question.
What does that right now is the burst of the real estate market bubble and the as yet, unsettled - where will it land (bottom) - housing market that sits at the foundation of the mortgage market; which does not produce a demand that derivatives so based MUST be settled, now, but if demanded to be settled now, then at what “value”; and, until this afternoon, ANY auditors operating under FASB would demand that value be “mark to market”. Some may view today’s SEC rule change as implying the “failure” at Lehman may not have been so large if its “derivatives” had not been needed to be assessed until tomorrow morning.