Credit Default Swaps

[Atreus21]

nm.

 

[zinfamous]

Originally posted by: frostedflakes
This was talked about a lot back when the financial crisis really started to hit. I'd assume most people here already have at least a general idea of what credit default swaps are and their role in the subprime mess.

I'd hope Congress is working on some meaninful financial reform. Regulation of the derivatives market is long overdue.

yeah, I thought this was well-understood to be the primary issue behind the mess, as these are what linked all of the major financial institutions into one colossal debt-ridden cluster-fuck.

Had bad loans been isolated with a few greedy companies, not such a problem. But the CDSs made this a system-wide problem, hence the catastrophe of many, many institutions collapsing and debt spreading across all sectors.

...that's how I understand it, anyway.

 

[zinfamous]

Originally posted by: da loser

Originally posted by: Nemesis 1
Just for instance without going into to conspiercy. Go to Google earth. Go to anartica.

look for yourselves. Why is over 1/3 of the interior shaded so you can't see detail .

Than zoom in on those places. Use your own eyes. Than back out and look at the size of that place. What the hell is going on? Who paid for that. I mean look its had to have cost trillions.

:laugh:

It was Tesla.





















oh, and the Jews, too.

 

[racolvin]

Fern is correct, IMHO. A sizeable percentage of CDS going round were nothing but parimutuel bets done by guys in suits on Wall Street.

There was a show on TV recently "House of Cards" (NBC maybe?) where a guy saw the downfall of the mortgage market and made a 1 Billion dollar "bet" via a CDS that the sub-prime market and those who owned them would take a tumble. Of course he won on his bet, as we all know what happened to the sub-prime mortgage market ..

But just like parimutuel betting (horse racing anyone?), he had no "skin" in the game other than his bet - he is 3rd party. He is neither the mortgage holder nor the mortgagee, so as far as I can tell he shouldn't be allowed to "bet" on whether I pay my mortgage or not, which is essentially what he did. This version of a CDS is no different than taking bets in Vegas and even those guys are regulated.

Now if I were a corporate bond holder of say some junk bonds and I wanted a little insurance to hedge my bet, I would be in a different position. As I have "skin" in the game, since I'm an actual bond holder, then taking out a CDS on my bonds would be acceptable. But the CDS "betting house" would need to be regulated just like any other insurance company, with capital reserve requirements, risk analysis that is verifiable by outside auditors, etc, etc. This type of regulation was specifically forbidden in that Commodity Futures Modernization Act that was passed ... and now we see what happens when the gamblers are allowed to run free with no rules or oversight

 

[zinfamous]

Originally posted by: Deleted member 4644
I agree 100% that CDS are almost the ENTIRE problem with the economy. I also accept that Clinton and his friends were big in allowing the CDS situation to expand.

HOWEVER, Reagan, Greenspan, Bush (Paulson), and others ALL supported and approved of this deregulation and very similar and related deregulation.

THEY ARE ALL TO BLAME.

Will you come together and agree with me on this?

We need politicians who are willing to accept that WE NEED TO REGULATE companies that can bring our country to its knees. "Growth" and "Capitalism" are worthless if it can all be destroyed by a few hundred greedy men.

I am ALL FOR competition, capitalism, and growth. But the rules need to prevent people from betting with other people money in wildly risky ways. If you want to make wild wild bets, you should be forced to do it with your OWN money and the money of people you deal with on a face to face basis, not some pension fund that you nominally control.

It is time to turn away from a system where the foxes are guarding the chicken pen.

:thumbsup:

Frankly, and perhaps I'm way off on this, but I feel that the way upper-tier education has shifted over to a very business-oriented crowd of students and away from the traditional knowledge-based fields, we've concurrently seen a lot of young, egotistical, horrible, horrible decision making.

The concept of business education is rather new, relatively speaking, and despite its claims otherwise, is certainly not framed around credible science. ("business science" is a laughable concept. all you have to do is look at how the typical business-minded teaching uses the tools of statistics)

Those that created these giant financial institutions and created what is now Wall-Street, were not really business grads. They worked themselves up, they maybe got a degree in philosophy, or some education that taught them to challenge their thinking, their reality....

Suddenly, these offices are crammed with young MBAs--it is now a requirement, though such didn't exist when these once-solid foundations were placed. Not to say that there is absolutely no value to be placed in business education, just that way too much stock and trust is being placed into a field that is, more or less, about communication.

There was an excellent article by a fortune 500 founder and retired CEO complaining about the same thing. He holds a PhD in philosophy, related the lessons you learn from a traditional education to how one truly learns to be successful, and how worthless most of the MBA applicants that came to interview were.

Basically, if you belong in business, you shouldn't be wasting your time in school "learning" about it.

 

[zephyrprime]

Originally posted by: shira
I'm thinking the same thing. When Paulsen first announced the concept of the TARP, he specifically mentioned that $56 trillion of CDSs were a looming threat.

Of course, $60 trillion (or whatever) of CDSs isn't the actual "exposure," because many counterparties to CDSs were also the underwriters of other CDSs. There are chains of CDSs, where the total face value may be 100 times the actual, net amount owed.

The so-called "notional" amount of CDSs is much smaller than $60 trillion. Seems I read a figure of $1.5 trillion or so.

Those guys were gamblers. Many of them bought CDS for bonds they don't own! In fact, the large majority of CDSs were sold to people that didn't own the underlying asset. Congress SHOULD have let AIG go bankrupt. Sure, the entire financial system would have come to a halt but financial systems can be restarted with injections of fiat money and nationalization. A clean sweep would be fast and effective. Instead, things are going to drag on for years in the US just like it did in Japan.

 

[soccerballtux]

Originally posted by: Fern
Is this a case of 'right punishment' but 'wrong person'? We try to strenuosly avoid that in our judicial system. Yet here they are blissfully pursuing it?

Fern

That's a very good point; spot on I think. My exec comp consulting friend was saying the exact same thing, I didn't catch it at the time but now that you phrase it like this, this was his point. The middle guys are going to be suffering consequences for actions they had (mostly) no control over.

Is it reasonable to expect the IT managers to be following what the company's financial sheet looks like and leave when they see the signs? That's asking a bit much. I'm not sure what else we could get passed at this point (besides taxing their profits) though that would, going forward, be as effective.

 

[shira]

Originally posted by: Fern

Originally posted by: shira

Originally posted by: Fern
Do you think our taxpayer bailout money should be paid to those who gambled on CDS?

Do you agree that's what we're doing?

Why is nobody talking about that?

Somebody buys insurance on a bond they don't even own, and we should cover them? These buyers aren't your average mom-and-pop types who didn't know what they were getting into. While the insurance sellers d@mn sure should have know the risk they were taking by "over-insuring' bonds, so should the buyers.
Fern

You're a fool.

Calling a counterparty to AIG CDs a "gambler" is like calling someone who purchases a auto or homeowner's insurance from Allstate or Prudential a gambler. AIG was at the time these CDS were created the biggest insurance underwriter on the planet. And calling counterparties to AIG - a then-triple-A-rated firm - "gamblers" is the height of 20-20 hindsight

These counterparties engaged in completely legal, contractually solid activities. You can no more tell them to "eat their losses" than you can tell ANY creditor to "just go away" and not force a debtor into bankruptcy.

These CDS holders can and will force AIG into bankruptcy if their contracts aren't honored. Congress cannot force good-faith, legal contracts to be abrogated simply because people like you don't like CDS and think buying insurance from a triple-A-rated firm is "risky."

You're wrong. And it looks like you don't understand insurance (risk management principles) or CDS's, or maybe either.

If you purchased CDS on bonds you didn't own, looks like gambling to me. This is completely different different from purchasing auto or homeowner insurance on your car or home.

CDS's differ in significant ways from regular insurance:

1. It's against insurance law/practice to 'over-insure'. I.e., you can't buy a $1 million policy for a house worth $250K. OTOH, CDS's allow you to do that by buying/selling 4 (or more) policies for only one $250K bond.

2. You can't insure property that you don't own. You don't own the home, you can't buy a policy on it, unlike CDS's.

No, they are much different in fundamental respects. And buying a CDS on property you don't own isn't insurance, it's gambling.

Buying coverage on a bond you don't own is a 'bet'. You're betting it will default, the seller is betting it won't. It's not insurance for an asset that you own (in any way).

Fern

Little boy,

CDSs are not auto or home insurance. Don't try to equate the two. AIG and its counterparties entered into completely legal contractual agreements whereby AIG promised to pay if the price of various securities fell below certain point. AIG didn't care that the counterparty didn't actually own the securities. AIG "gambled" that the the "premiums" they received would more than cover any CDSs claims.

AIG gambled and lost.
The counterparties gambled and WON.

You want to screw the counterparties for being right.

 

[sciwizam]

Originally posted by: shira

Little boy,

CDSs are not auto or home insurance. Don't try to equate the two. AIG and its counterparties entered into completely legal contractual agreements whereby AIG promised to pay if the price of various securities fell below certain point. AIG didn't care that the counterparty didn't actually own the securities. AIG "gambled" that the the "premiums" they received would more than cover any CDSs claims.

AIG gambled and lost.
The counterparties gambled and WON.

You want to screw the counterparties for being right.

:disgust:

He was trying to explain the concept of over-insuring, not equating CDS with house insurance.

 

[LegendKiller]

Originally posted by: Deleted member 4644
I agree 100% that CDS are almost the ENTIRE problem with the economy. I also accept that Clinton and his friends were big in allowing the CDS situation to expand.

HOWEVER, Reagan, Greenspan, Bush (Paulson), and others ALL supported and approved of this deregulation and very similar and related deregulation.

THEY ARE ALL TO BLAME.

Will you come together and agree with me on this?

We need politicians who are willing to accept that WE NEED TO REGULATE companies that can bring our country to its knees. "Growth" and "Capitalism" are worthless if it can all be destroyed by a few hundred greedy men.

I am ALL FOR competition, capitalism, and growth. But the rules need to prevent people from betting with other people money in wildly risky ways. If you want to make wild wild bets, you should be forced to do it with your OWN money and the money of people you deal with on a face to face basis, not some pension fund that you nominally control.

It is time to turn away from a system where the foxes are guarding the chicken pen.

CDS isn't even 10% of the problem. If they didn't exist we'd still be in this problem.

 

[LegendKiller]

Originally posted by: shira

Originally posted by: Fern

Originally posted by: shira

Originally posted by: Fern
Do you think our taxpayer bailout money should be paid to those who gambled on CDS?

Do you agree that's what we're doing?

Why is nobody talking about that?

Somebody buys insurance on a bond they don't even own, and we should cover them? These buyers aren't your average mom-and-pop types who didn't know what they were getting into. While the insurance sellers d@mn sure should have know the risk they were taking by "over-insuring' bonds, so should the buyers.
Fern

You're a fool.

Calling a counterparty to AIG CDs a "gambler" is like calling someone who purchases a auto or homeowner's insurance from Allstate or Prudential a gambler. AIG was at the time these CDS were created the biggest insurance underwriter on the planet. And calling counterparties to AIG - a then-triple-A-rated firm - "gamblers" is the height of 20-20 hindsight

These counterparties engaged in completely legal, contractually solid activities. You can no more tell them to "eat their losses" than you can tell ANY creditor to "just go away" and not force a debtor into bankruptcy.

These CDS holders can and will force AIG into bankruptcy if their contracts aren't honored. Congress cannot force good-faith, legal contracts to be abrogated simply because people like you don't like CDS and think buying insurance from a triple-A-rated firm is "risky."

You're wrong. And it looks like you don't understand insurance (risk management principles) or CDS's, or maybe either.

If you purchased CDS on bonds you didn't own, looks like gambling to me. This is completely different different from purchasing auto or homeowner insurance on your car or home.

CDS's differ in significant ways from regular insurance:

1. It's against insurance law/practice to 'over-insure'. I.e., you can't buy a $1 million policy for a house worth $250K. OTOH, CDS's allow you to do that by buying/selling 4 (or more) policies for only one $250K bond.

2. You can't insure property that you don't own. You don't own the home, you can't buy a policy on it, unlike CDS's.

No, they are much different in fundamental respects. And buying a CDS on property you don't own isn't insurance, it's gambling.

Buying coverage on a bond you don't own is a 'bet'. You're betting it will default, the seller is betting it won't. It's not insurance for an asset that you own (in any way).

Fern

Little boy,

CDSs are not auto or home insurance. Don't try to equate the two. AIG and its counterparties entered into completely legal contractual agreements whereby AIG promised to pay if the price of various securities fell below certain point. AIG didn't care that the counterparty didn't actually own the securities. AIG "gambled" that the the "premiums" they received would more than cover any CDSs claims.

AIG gambled and lost.
The counterparties gambled and WON.

You want to screw the counterparties for being right.

You seem to think that having a contract makes the action valid. Contracts have been, and will continue to be, broken if the contract was fraudulent or found to be incorrect in any number of ways. Personally, I sometimes wonder if we'd be better off just shutting down the whole CDS market and declaring the game over.

They were playing a game, nothing more. That game was to build a heap of garbage and pay out before somebody else forced them to pay out.

CDS should be heavily regulated.

 

[BoberFett]

That's the first thing you've said in a long time that I agree with LK. Probably because I've mentioned the exact same solution before.

Simply void all existing CDSs. Anybody who held a CDS is just SOL. They lose the monthly "premium" they've been paying on that contract, but too bad. They should have known better. Those liabilities are simply off the books for the insurer and we're back to where we were pre-CDS.

It's far too simple, so there must be a catch in there somewhere, but if it's nothing more than a glorified insurance contract there was never an asset behind it so nothing is lost.

 

[Pneumothorax]

Originally posted by: BoberFett

Simply void all existing CDSs. Anybody who held a CDS is just SOL. They lose the monthly "premium" they've been paying on that contract, but too bad. They should have known better. Those liabilities are simply off the books for the insurer and we're back to where we were pre-CDS.

The main problem with that is the holders of CDS OWN a large chunk of the big players in DC.

 

[Deleted member 4644]

Originally posted by: LegendKiller

Originally posted by: Deleted member 4644
I agree 100% that CDS are almost the ENTIRE problem with the economy. I also accept that Clinton and his friends were big in allowing the CDS situation to expand.

HOWEVER, Reagan, Greenspan, Bush (Paulson), and others ALL supported and approved of this deregulation and very similar and related deregulation.

THEY ARE ALL TO BLAME.

Will you come together and agree with me on this?

We need politicians who are willing to accept that WE NEED TO REGULATE companies that can bring our country to its knees. "Growth" and "Capitalism" are worthless if it can all be destroyed by a few hundred greedy men.

I am ALL FOR competition, capitalism, and growth. But the rules need to prevent people from betting with other people money in wildly risky ways. If you want to make wild wild bets, you should be forced to do it with your OWN money and the money of people you deal with on a face to face basis, not some pension fund that you nominally control.

It is time to turn away from a system where the foxes are guarding the chicken pen.

CDS isn't even 10% of the problem. If they didn't exist we'd still be in this problem.

I don't believe you unless you can articulate why this is true.

 

[LegendKiller]

Originally posted by: Deleted member 4644

Originally posted by: LegendKiller

Originally posted by: Deleted member 4644
I agree 100% that CDS are almost the ENTIRE problem with the economy. I also accept that Clinton and his friends were big in allowing the CDS situation to expand.

HOWEVER, Reagan, Greenspan, Bush (Paulson), and others ALL supported and approved of this deregulation and very similar and related deregulation.

THEY ARE ALL TO BLAME.

Will you come together and agree with me on this?

We need politicians who are willing to accept that WE NEED TO REGULATE companies that can bring our country to its knees. "Growth" and "Capitalism" are worthless if it can all be destroyed by a few hundred greedy men.

I am ALL FOR competition, capitalism, and growth. But the rules need to prevent people from betting with other people money in wildly risky ways. If you want to make wild wild bets, you should be forced to do it with your OWN money and the money of people you deal with on a face to face basis, not some pension fund that you nominally control.

It is time to turn away from a system where the foxes are guarding the chicken pen.

CDS isn't even 10% of the problem. If they didn't exist we'd still be in this problem.

I don't believe you unless you can articulate why this is true.

CDS only pays out on a default, not on a mark to market loss. Naturally a default will occur if banks take enough mark to market losses, but that isn't the real trigger, is it? If you go one level further, what exactly caused the M2M losses? Illiquidity due to everybody engorging themselves on trash RMBS backed by Alt-A, Subprime, NINJA loans. Sure, CDOs have busted and defaulted on payments, but the vast majority of CDS weren't going after CDOs, so you lose there.

You're looking at the tail and saying it is wagging the dog.

 

[jman19]

Originally posted by: Fern

Originally posted by: jman19
CDS contracts don't get enough attention? Have you been living under a rock?

No, I don't think so.

I'm wondering if that's where a lot of our bailout money is going.

Since there's no transparency there (at least that I can see) I can't really tell. I've lately read that $38 Billion of the money AIG received went to foreign banks. Why? Was it CDS? I'm thinking so ATM.

Edit: Link This article details some of the payments that went to foreign banks (I'm coming up with about $34-36 Billion)

Fern

You can stop wondering, the news about AIGs counterparties came out a while ago.

 

[Deleted member 4644]

Originally posted by: LegendKiller

Originally posted by: Deleted member 4644

Originally posted by: LegendKiller

Originally posted by: Deleted member 4644
I agree 100% that CDS are almost the ENTIRE problem with the economy. I also accept that Clinton and his friends were big in allowing the CDS situation to expand.

HOWEVER, Reagan, Greenspan, Bush (Paulson), and others ALL supported and approved of this deregulation and very similar and related deregulation.

THEY ARE ALL TO BLAME.

Will you come together and agree with me on this?

We need politicians who are willing to accept that WE NEED TO REGULATE companies that can bring our country to its knees. "Growth" and "Capitalism" are worthless if it can all be destroyed by a few hundred greedy men.

I am ALL FOR competition, capitalism, and growth. But the rules need to prevent people from betting with other people money in wildly risky ways. If you want to make wild wild bets, you should be forced to do it with your OWN money and the money of people you deal with on a face to face basis, not some pension fund that you nominally control.

It is time to turn away from a system where the foxes are guarding the chicken pen.

CDS isn't even 10% of the problem. If they didn't exist we'd still be in this problem.

I don't believe you unless you can articulate why this is true.

CDS only pays out on a default, not on a mark to market loss. Naturally a default will occur if banks take enough mark to market losses, but that isn't the real trigger, is it? If you go one level further, what exactly caused the M2M losses? Illiquidity due to everybody engorging themselves on trash RMBS backed by Alt-A, Subprime, NINJA loans. Sure, CDOs have busted and defaulted on payments, but the vast majority of CDS weren't going after CDOs, so you lose there.

You're looking at the tail and saying it is wagging the dog.

So you are saying that the CDS liabilities and defaults are not the issue. You are saying the illiquidity of the financial organizations was caused by taking an overly large position in trash residential mortgage backed securities.

Here is my question then, did those RMBS stop paying? Is that what caused it all to grind to a halt? And if they did stop paying, wouldn't that trigger the CDS?

So, 1) how are the CDS unrelated to the RMBS they insured, or

2) if they are related, is it your claim that such a large number of mortgages defaulted that the loss of the money stream is the majority of the real problem?

Or, but another way, what do you claim *caused the illiquidity* when previously the RMBS WERE making money for their sellers and owners.

 

[GTKeeper]

Originally posted by: LegendKiller

Originally posted by: Deleted member 4644

Originally posted by: LegendKiller

Originally posted by: Deleted member 4644
I agree 100% that CDS are almost the ENTIRE problem with the economy. I also accept that Clinton and his friends were big in allowing the CDS situation to expand.

HOWEVER, Reagan, Greenspan, Bush (Paulson), and others ALL supported and approved of this deregulation and very similar and related deregulation.

THEY ARE ALL TO BLAME.

Will you come together and agree with me on this?

We need politicians who are willing to accept that WE NEED TO REGULATE companies that can bring our country to its knees. "Growth" and "Capitalism" are worthless if it can all be destroyed by a few hundred greedy men.

I am ALL FOR competition, capitalism, and growth. But the rules need to prevent people from betting with other people money in wildly risky ways. If you want to make wild wild bets, you should be forced to do it with your OWN money and the money of people you deal with on a face to face basis, not some pension fund that you nominally control.

It is time to turn away from a system where the foxes are guarding the chicken pen.

CDS isn't even 10% of the problem. If they didn't exist we'd still be in this problem.

I don't believe you unless you can articulate why this is true.

CDS only pays out on a default, not on a mark to market loss. Naturally a default will occur if banks take enough mark to market losses, but that isn't the real trigger, is it? If you go one level further, what exactly caused the M2M losses? Illiquidity due to everybody engorging themselves on trash RMBS backed by Alt-A, Subprime, NINJA loans. Sure, CDOs have busted and defaulted on payments, but the vast majority of CDS weren't going after CDOs, so you lose there.

You're looking at the tail and saying it is wagging the dog.

LK, way oversimplified..... and M2M losses do have an effect. When a company takes losses and marks them down, look what happens to their CDS spread.... it usually goes UP and that puts downard pressure on the underlying stock.

Based on CDS prices a month ago, they were pricing in a 25% chance that GE would go totally bust. CDS spreads went very high, very quickly. Then pile on some more naked CDSs that GE will go bust and bam, you put tremendous pressure on the stock.

 

[Deleted member 4644]

Originally posted by: GTKeeper

Originally posted by: LegendKiller

Originally posted by: Deleted member 4644

Originally posted by: LegendKiller

Originally posted by: Deleted member 4644
I agree 100% that CDS are almost the ENTIRE problem with the economy. I also accept that Clinton and his friends were big in allowing the CDS situation to expand.

HOWEVER, Reagan, Greenspan, Bush (Paulson), and others ALL supported and approved of this deregulation and very similar and related deregulation.

THEY ARE ALL TO BLAME.

Will you come together and agree with me on this?

We need politicians who are willing to accept that WE NEED TO REGULATE companies that can bring our country to its knees. "Growth" and "Capitalism" are worthless if it can all be destroyed by a few hundred greedy men.

I am ALL FOR competition, capitalism, and growth. But the rules need to prevent people from betting with other people money in wildly risky ways. If you want to make wild wild bets, you should be forced to do it with your OWN money and the money of people you deal with on a face to face basis, not some pension fund that you nominally control.

It is time to turn away from a system where the foxes are guarding the chicken pen.

CDS isn't even 10% of the problem. If they didn't exist we'd still be in this problem.

I don't believe you unless you can articulate why this is true.

CDS only pays out on a default, not on a mark to market loss. Naturally a default will occur if banks take enough mark to market losses, but that isn't the real trigger, is it? If you go one level further, what exactly caused the M2M losses? Illiquidity due to everybody engorging themselves on trash RMBS backed by Alt-A, Subprime, NINJA loans. Sure, CDOs have busted and defaulted on payments, but the vast majority of CDS weren't going after CDOs, so you lose there.

You're looking at the tail and saying it is wagging the dog.

LK, way oversimplified..... and M2M losses do have an effect. When a company takes losses and marks them down, look what happens to their CDS spread.... it usually goes UP and that puts downard pressure on the underlying stock.

Based on CDS prices a month ago, they were pricing in a 25% chance that GE would go totally bust. CDS spreads went very high, very quickly. Then pile on some more naked CDSs that GE will go bust and bam, you put tremendous pressure on the stock.

Not to mention that CDOs were priced BASED ON CDSs!!!!!


http://www.wired.com/techbiz/i..._quant?currentPage=all

 

[LegendKiller]

Originally posted by: GTKeeper

Originally posted by: LegendKiller

Originally posted by: Deleted member 4644

Originally posted by: LegendKiller

Originally posted by: Deleted member 4644
I agree 100% that CDS are almost the ENTIRE problem with the economy. I also accept that Clinton and his friends were big in allowing the CDS situation to expand.

HOWEVER, Reagan, Greenspan, Bush (Paulson), and others ALL supported and approved of this deregulation and very similar and related deregulation.

THEY ARE ALL TO BLAME.

Will you come together and agree with me on this?

We need politicians who are willing to accept that WE NEED TO REGULATE companies that can bring our country to its knees. "Growth" and "Capitalism" are worthless if it can all be destroyed by a few hundred greedy men.

I am ALL FOR competition, capitalism, and growth. But the rules need to prevent people from betting with other people money in wildly risky ways. If you want to make wild wild bets, you should be forced to do it with your OWN money and the money of people you deal with on a face to face basis, not some pension fund that you nominally control.

It is time to turn away from a system where the foxes are guarding the chicken pen.

CDS isn't even 10% of the problem. If they didn't exist we'd still be in this problem.

I don't believe you unless you can articulate why this is true.

CDS only pays out on a default, not on a mark to market loss. Naturally a default will occur if banks take enough mark to market losses, but that isn't the real trigger, is it? If you go one level further, what exactly caused the M2M losses? Illiquidity due to everybody engorging themselves on trash RMBS backed by Alt-A, Subprime, NINJA loans. Sure, CDOs have busted and defaulted on payments, but the vast majority of CDS weren't going after CDOs, so you lose there.

You're looking at the tail and saying it is wagging the dog.

LK, way oversimplified..... and M2M losses do have an effect. When a company takes losses and marks them down, look what happens to their CDS spread.... it usually goes UP and that puts downard pressure on the underlying stock.

Based on CDS prices a month ago, they were pricing in a 25% chance that GE would go totally bust. CDS spreads went very high, very quickly. Then pile on some more naked CDSs that GE will go bust and bam, you put tremendous pressure on the stock.

So was the problem M2M or the CDS? Which is the tail, which is the dog?

If you weren't taking M2M losses your CDS wouldn't be going up. If you didn't have CDS you'd still have M2M.

Which one is the primary and which is the derivative?

 

[GTKeeper]

Originally posted by: LegendKiller

Originally posted by: GTKeeper

Originally posted by: LegendKiller

Originally posted by: Deleted member 4644

Originally posted by: LegendKiller

Originally posted by: Deleted member 4644
I agree 100% that CDS are almost the ENTIRE problem with the economy. I also accept that Clinton and his friends were big in allowing the CDS situation to expand.

HOWEVER, Reagan, Greenspan, Bush (Paulson), and others ALL supported and approved of this deregulation and very similar and related deregulation.

THEY ARE ALL TO BLAME.

Will you come together and agree with me on this?

We need politicians who are willing to accept that WE NEED TO REGULATE companies that can bring our country to its knees. "Growth" and "Capitalism" are worthless if it can all be destroyed by a few hundred greedy men.

I am ALL FOR competition, capitalism, and growth. But the rules need to prevent people from betting with other people money in wildly risky ways. If you want to make wild wild bets, you should be forced to do it with your OWN money and the money of people you deal with on a face to face basis, not some pension fund that you nominally control.

It is time to turn away from a system where the foxes are guarding the chicken pen.

CDS isn't even 10% of the problem. If they didn't exist we'd still be in this problem.

I don't believe you unless you can articulate why this is true.

CDS only pays out on a default, not on a mark to market loss. Naturally a default will occur if banks take enough mark to market losses, but that isn't the real trigger, is it? If you go one level further, what exactly caused the M2M losses? Illiquidity due to everybody engorging themselves on trash RMBS backed by Alt-A, Subprime, NINJA loans. Sure, CDOs have busted and defaulted on payments, but the vast majority of CDS weren't going after CDOs, so you lose there.

You're looking at the tail and saying it is wagging the dog.

LK, way oversimplified..... and M2M losses do have an effect. When a company takes losses and marks them down, look what happens to their CDS spread.... it usually goes UP and that puts downard pressure on the underlying stock.

Based on CDS prices a month ago, they were pricing in a 25% chance that GE would go totally bust. CDS spreads went very high, very quickly. Then pile on some more naked CDSs that GE will go bust and bam, you put tremendous pressure on the stock.

So was the problem M2M or the CDS? Which is the tail, which is the dog?

If you weren't taking M2M losses your CDS wouldn't be going up. If you didn't have CDS you'd still have M2M.

Which one is the primary and which is the derivative?

The fundemental structure of CDSs are more damaging than simply M2M. If CDSs had proper margin requirements and collateral requirements, you would never ever ever have the 100+ trillion notional value anyway because there woulnd't be enough real cash and collateral to back all that up.


You can actually take 0 M2M losses and watch your CDS spreads go up overnight as more and more people buy CDSs against your company on a 'hunch', pushing your stock price down, and making your short term debt costs go up. If you take M2M losses, CDS spreads go up again, probably more so.

The problem with CDSs is that they are a form of a 'lie' to the market. If I have a shitty bond that is worth 50 cents on the dollar and I buy some CDSs that I pay lets say a 5% premium on, thus allowing me to carry the bond at par, how truthful are my books? M2M says I should mark down my bond, I say no, because I have this nice insurance on it. Either way, I am insolvent once my bonds stop being cashflow positive.