In Light of Crisis, Common Trading Practice Looks Risky
Friday, October 3, 2008
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/02/AR2008100203890.html
Widely used by banks, hedge funds and other investors, credit-default swaps’ total outstanding value likely exceeds $58 trillion. But because the markets are unregulated, there is no guarantee that sellers of swaps would pay their obligations.
The turbulence in the credit default market may indicate that the financial markets’ problems will not be resolved by the Bush administration’s $700 billion plan to purchase troubled mortgage assets. Even though many in the markets expect Congress to pass the rescue effort today, the credit-default swap markets continue to indicate turmoil ahead for financial firms.
Credit default swap from post #37 continued;
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/02/AR2008100203890_2.html
There is no federal regulation of the credit-default swap market, but the Securities and Exchange Commission has asked Congress for that authority in what would be a sweeping extension of its responsibilities.
“This potential for unfettered naked shorting and the lack of regulation in this market are a cause for great concern,” SEC chairman Christopher Cox said. Any change is not likely to happen until Congress returns in January.
Credit default swap continued from post #37
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For Sallie Mae, the annual cost of purchasing a credit-default swap insurance policy has roughly doubled in the past week to $1.6 million for every $10 million in bonds, according to Bloomberg. That price, according to Bloomberg, suggests a 74 percent chance that Sallie Mae will default on its debts within five years.
Yesterday Sallie Mae’s chief executive Albert L. Lord sought to fight off the perception that his firm was on shaky ground. He said in a SEC filing that the firm is “liquid and well capitalized.” He cited a new program put in place by the Education Department that not only guarantees the loans, but also directly funds them.
With the federal government behind the firm, Sallie Mae is reducing its reliance on private lenders to raise money to issue student loans.
Mark Kantrowitz, publisher of FinAid, a Web site that provides financial advice for students, said he did not understand why Sallie Mae’s credit-default swaps soared this week. But the firm faces problems, he said.
The rising cost of borrowing because of the turmoil in the credit markets is squeezing its profits. If these rates continue to stay high, he said, Sallie Mae may struggle to pay its debts.