A couple of points to add is that the “insurance” aspect of the swaps was imaginary. The underwriters weren’t held to insurance backing standards — BECAUSE IT WASN’T REAL INSURANCE, it was just touted like it was. So the CDS were being used as a collaterization or to balance against loans with the supposed reinforcement that it was backed by “insurance” but the “insurance” was bogus.
Additionally as the 90s brought us the “mark-to-market” accounting (partly due to the tax-man’s lust) the holders of all these various derivatives and lumped investments failed to accurately start marking down their valuse and massive distrust insued. The distrust fueled the short sellers and sharks, like the hedge funds — shorting rulls had be scraped in the 90s so it was a feeding frenzy as they beat down those not being deadly honest.
Much of the push to avoid honesty was that (as you pointed out to begin with) they were almost all public traded firms with quarterly reports and stock prices making up major compensation. Additionally, as they lost value in these investments on their books, now being marked to current market value, those that were finacially regulated firms had insuffient reserves so they went hunting for big cash influxes and those were limited by falling stock worth.
Tulips. I tell you it was just like Holland and the Tulip bubble.
Since government planned outcomes and planned economies were the cause, they are obviously not the solution. Regulation was not the cause however and neither was law. The too sudden change to regulation was contributory but the government planning of outcomes (hat-tip to Road to Surfdom) was the true cause and must not be used as the solution.
It’s late, but I want to tell you mark-to-market is the best way to expose the cheaters.
For example, your friend paid $500,000 cash for his house. He tells you how great everything there is. The Book Value would be $500,000.
But now say he wants to borrow money from you and use his half-a-million dollar house as collateral
You sir, aren’t an idiot so you decide to take a look at his house first. bedroom shack in-between a low rent trailer park and a nuclear waste dump. You wouldn’t pay more that $2,000 for that house - and only if you lost a bet. The $2,000 would be the mark-to-market value.
Do you make the loan to your friend based on the book value of his house or the mark-to-market value?