Comments on: When it Comes to Naming Wall Street’s Worst Invention Ever, Credit Default Swaps Continue to Fill the Bill http://www.moneymorning.com/2009/03/04/credit-default-swaps-4/ Investment News Provider Thu, 19 Nov 2009 15:36:16 -0600 http://wordpress.org/?v=2.8.4 hourly 1 By: BillWilliam http://www.moneymorning.com/2009/03/04/credit-default-swaps-4/comment-page-1/#comment-26508 BillWilliam Tue, 15 Sep 2009 04:36:41 +0000 http://www.moneymorning.com/?p=5345#comment-26508 I thought when I read what the "professionals" knew about the CDS fraud There would be some semblance of truth. But no. First of all what happened to AIG is not the problem. They were operating under British law. The cause was U.S. law which had no rules or regulation of the issuance of Credit Default Swap contracts. This allowed criminals, aka leaders of Wall Street Goldman Sacks CEO in particular, to set up the scheme to cover risky derivatives with more than one CDS for each derivative. These derivatives were made up of risky mortgages some of which were known as NINJNA. The dollar ratio of CDS to mortgage value was about 50:1. People who had no interest in the derivatives bought the CDS in the hope the mortgages would be foreclosed. In regulated insurance you can only buy one policy per item. The fee for the CDS should have represented the true risk of the underlying derivative. But that would make the CDS too expensive for the crime to work. So they said, the criminals they were in leadership and regulating roles throughout Wall Street, This is a new product so we will invent a risk. A low risk. A little talk to their buddies at the bond rating companies and they had AAA ratings. Then just wait for a small down turn in the housing market. A little short sell by Goldman Sacks to spring the trap and those who bought the CDS contracts were rich. The rest of us were poor. CDS contracts have no use except for crime. Back in about 1919 there were similar operations that caused a major recession. The practice was outlawed by the Federal Government and every State. It should be outlawed again. If an investment is so risky you can't go into the deal without a hedge then it is a poor deal and do not make it. But that requires "common sense", do you have it. Yes I made straight A's in Economics and Finance and in most other classes. Engineering and Business. I locked in my profits on my IRA, I'm old and disabled retired, in Oct, 2007. What good timing. Why would I do that? I thought when I read what the “professionals” knew about the CDS fraud There would be some semblance of truth. But no. First of all what happened to AIG is not the problem. They were operating under British law. The cause was U.S. law which had no rules or regulation of the issuance of Credit Default Swap contracts. This allowed criminals, aka leaders of Wall Street Goldman Sacks CEO in particular, to set up the scheme to cover risky derivatives with more than one CDS for each derivative. These derivatives were made up of risky mortgages some of which were known as NINJNA. The dollar ratio of CDS to mortgage value was about 50:1. People who had no interest in the derivatives bought the CDS in the hope the mortgages would be foreclosed. In regulated insurance you can only buy one policy per item. The fee for the CDS should have represented the true risk of the underlying derivative. But that would make the CDS too expensive for the crime to work. So they said, the criminals they were in leadership and regulating roles throughout Wall Street, This is a new product so we will invent a risk. A low risk. A little talk to their buddies at the bond rating companies and they had AAA ratings. Then just wait for a small down turn in the housing market. A little short sell by Goldman Sacks to spring the trap and those who bought the CDS contracts were rich. The rest of us were poor. CDS contracts have no use except for crime. Back in about 1919 there were similar operations that caused a major recession. The practice was outlawed by the Federal Government and every State. It should be outlawed again. If an investment is so risky you can’t go into the deal without a hedge then it is a poor deal and do not make it. But that requires “common sense”, do you have it. Yes I made straight A’s in Economics and Finance and in most other classes. Engineering and Business. I locked in my profits on my IRA, I’m old and disabled retired, in Oct, 2007. What good timing. Why would I do that?

]]> By: Estonian http://www.moneymorning.com/2009/03/04/credit-default-swaps-4/comment-page-1/#comment-22489 Estonian Tue, 26 May 2009 03:48:00 +0000 http://www.moneymorning.com/?p=5345#comment-22489 The economy of Estonia is on the verge of an extremely severe crash due to a high exposure to CDS. We are the innocent victims of reckless casino capitalism enabled by irresponsible US governments who very well knew that the crash was inevitable (several economists have predicted it, for example professors Nouriel Roubini 1-2 years before and Michael Hudson 6 years before) but looked the other way. I feel is fundamentally unfair that this destructive financial bomb, created by American finance gamblers and endorsed by the US government, is allowed to cause severe suffering outside the US. The US government carries the whole responsibility, having eliminated the regulations that were created in the 30-ies to prevent the emergence of another "megabubble" depression. Every economics and business student in the US, and consequently every financial advisor has been carefully informed during their studies about the mechanims of the great depression and the importance of preventive regulation, so don't say you did not know. The US government must carry the whole economical responsibility for the consequences of their irresponsible actions. US is like someone who, because of severe carelessness, puts your house on fire so it burns down to ashes and then demands that the owner must pay the whole bill for restoring it. Can you understand that any remains of sympathy for the US is rapidly withering away in the world? In Europe even many non-socialists are now detesting capitalism, describing it as a system of organized greed for favoring the already rich at the expense of the people. The present bailout of bankers in stead of financing constructive restorative projects to help the people is a very obvious confirmation of this understanding. It is extremely naive by the US to believe that such strong and very pervasive sentiments can be calmed by some sweet talk and lofty promises, especially when you have "burnt down our house" creating untold suffering among millions of Europeans. I talked with the CEO of a real estate company yesterday - she cried out of despair when thinking of the thousands of honest, good people now being thrown out of their houses into misery due to foreclosures. If the US government does not help defuse the CDS bomb, by taking due responsibility for it, it will generate intense hatred among those billions all over the world, whose "houses it has burnt down". You can forget exporting anything however cheap and useful. Do you believe anyone outside the US will ever want to buy products of a country that has destroyed your country through enabling reckless casino capitalism? The people of the US has enabled and supported this destructive behavior by electing these irresponsible politicians. It is time that you take the responsibility for your mistake and demand that the US repents for its destructive behavior against the whole world taking the full responsibility for its consequences including the terrible CDS bomb. The economy of Estonia is on the verge of an extremely severe crash due to a high exposure to CDS.

We are the innocent victims of reckless casino capitalism enabled by irresponsible US governments who very well knew that the crash was inevitable (several economists have predicted it, for example professors Nouriel Roubini 1-2 years before and Michael Hudson 6 years before) but looked the other way.

I feel is fundamentally unfair that this destructive financial bomb, created by American finance gamblers and endorsed by the US government, is allowed to cause severe suffering outside the US. The US government carries the whole responsibility, having eliminated the regulations that were created in the 30-ies to prevent the emergence of another “megabubble” depression. Every economics and business student in the US, and consequently every financial advisor has been carefully informed during their studies about the mechanims of the great depression and the importance of preventive regulation, so don’t say you did not know. The US government must carry the whole economical responsibility for the consequences of their irresponsible actions.

US is like someone who, because of severe carelessness, puts your house on fire so it burns down to ashes and then demands that the owner must pay the whole bill for restoring it.

Can you understand that any remains of sympathy for the US is rapidly withering away in the world? In Europe even many non-socialists are now detesting capitalism, describing it as a system of organized greed for favoring the already rich at the expense of the people. The present bailout of bankers in stead of financing constructive restorative projects to help the people is a very obvious confirmation of this understanding.

It is extremely naive by the US to believe that such strong and very pervasive sentiments can be calmed by some sweet talk and lofty promises, especially when you have “burnt down our house” creating untold suffering among millions of Europeans. I talked with the CEO of a real estate company yesterday – she cried out of despair when thinking of the thousands of honest, good people now being thrown out of their houses into misery due to foreclosures.

If the US government does not help defuse the CDS bomb, by taking due responsibility for it, it will generate intense hatred among those billions all over the world, whose “houses it has burnt down”. You can forget exporting anything however cheap and useful. Do you believe anyone outside the US will ever want to buy products of a country that has destroyed your country through enabling reckless casino capitalism?

The people of the US has enabled and supported this destructive behavior by electing these irresponsible politicians. It is time that you take the responsibility for your mistake and demand that the US repents for its destructive behavior against the whole world taking the full responsibility for its consequences including the terrible CDS bomb.

]]> By: How Credit Default Swaps Could Reverse the Economic Recovery http://www.moneymorning.com/2009/03/04/credit-default-swaps-4/comment-page-1/#comment-22107 How Credit Default Swaps Could Reverse the Economic Recovery Fri, 15 May 2009 09:38:27 +0000 http://www.moneymorning.com/?p=5345#comment-22107 [...] As large as Freddie and Fannie are in the U.S. housing and mortgage markets, even their combined portfolio value – estimated at about $13 trillion – is dwarfed by an exponentially larger and even more insidious monster running over regulators like they’re not there. I’m talking about the $40 trillion stranglehold that the credit default swap market has on corporations all around the.... [...] [...] As large as Freddie and Fannie are in the U.S. housing and mortgage markets, even their combined portfolio value – estimated at about $13 trillion – is dwarfed by an exponentially larger and even more insidious monster running over regulators like they’re not there. I’m talking about the $40 trillion stranglehold that the credit default swap market has on corporations all around the…. [...]

]]> By: Citi Reports Profit, But Some Analysts Advise Further Caution on Big Banks http://www.moneymorning.com/2009/03/04/credit-default-swaps-4/comment-page-1/#comment-17486 Citi Reports Profit, But Some Analysts Advise Further Caution on Big Banks Tue, 10 Mar 2009 20:29:32 +0000 http://www.moneymorning.com/?p=5345#comment-17486 [...] Morning Contributing Editor Martin Hutchinson said last week that trading in credit-default swaps is tantamount to “casino capitalism,” because they are bought and sold in a murky, private market that is largely beyond the [...] [...] Morning Contributing Editor Martin Hutchinson said last week that trading in credit-default swaps is tantamount to “casino capitalism,” because they are bought and sold in a murky, private market that is largely beyond the [...]

]]> By: ben http://www.moneymorning.com/2009/03/04/credit-default-swaps-4/comment-page-1/#comment-17356 ben Mon, 09 Mar 2009 06:02:29 +0000 http://www.moneymorning.com/?p=5345#comment-17356 It seems from this article that AIG et al. were not really the one's bailed out, but the contra parties on CDS. Who were these contra parties, and why would the government step in to protect them? The buyers of CDS should have done their own due diligence on AIG and the writers of the CDS, and if the CDS writers defaulted, too bad. It seems from this article that AIG et al. were not really the one’s bailed out, but the contra parties on CDS. Who were these contra parties, and why would the government step in to protect them? The buyers of CDS should have done their own due diligence on AIG and the writers of the CDS, and if the CDS writers defaulted, too bad.

]]> By: MediaMac http://www.moneymorning.com/2009/03/04/credit-default-swaps-4/comment-page-1/#comment-17334 MediaMac Sun, 08 Mar 2009 17:09:56 +0000 http://www.moneymorning.com/?p=5345#comment-17334 Before the first bailout, I chastised Congress and 'talking heads' alike that all of the focus was on the 'spilt milk' and not on the root cause. The government subsidy went to banks that were suffering under "mark to market", a well-intended but ill-conceived accounting philosophy that has no roll in a true "market economy". At the most, banks should have been bailed out exclusively on the non-performance aspect of the underlying debt. Specifically, the lost interest income over a preset period of time (3-5 years). In the absence of "mark to market", the banks could have sustained the infusion as loans secured by low interest convertible debentures. All for less than half the amount being dispersed, and largely recoverable for the taxpayers. Win-Win-Win! Stay tuned for my take on a Recovery Plan. Before the first bailout, I chastised Congress and ‘talking heads’ alike that all of the focus was on the ’spilt milk’ and not on the root cause. The government subsidy went to banks that were suffering under “mark to market”, a well-intended but ill-conceived accounting philosophy that has no roll in a true “market economy”.

At the most, banks should have been bailed out exclusively on the non-performance aspect of the underlying debt. Specifically, the lost interest income over a preset period of time (3-5 years). In the absence of “mark to market”, the banks could have sustained the infusion as loans secured by low interest convertible debentures. All for less than half the amount being dispersed, and largely recoverable for the taxpayers.

Win-Win-Win!

Stay tuned for my take on a Recovery Plan.

]]> By: c joe http://www.moneymorning.com/2009/03/04/credit-default-swaps-4/comment-page-1/#comment-17325 c joe Sun, 08 Mar 2009 13:23:46 +0000 http://www.moneymorning.com/?p=5345#comment-17325 Dear CDS Critic: It appears we Citizens are obsessed with the Blame Game, when we get the perpitrator properly identified, we can then go about perfecting the "Cure.!" Well guess what? Will that bring back ENRON? Bear Sterns? Bernie Maloof's lost fortunes? AIG's Missteps? GM/Chryslers financial crisis? The banking Crisis? The Housing Crisis? It appears to me, that Government's Cures for the ills that face us, are proving to be more impotent, than the very ills that face us? When this crisis is all over, we will be left with monutains of ill conceived debt, that we plunged into, because our leadership said we must. Our leadership in Washington, is IMPOTENT, TOO! The Resolution Trust Company, successfully dealt with the last mortgage crisis, as did other, "Focused Approaches," in earlier times. Why do we not emply "Tried & True Remedies?" We cannot, "Spend our way out of a poorly constructed Economy Built upon Foolish, Out of Control SPENDING? CHANGE CHANGE CHANGE INDEED! It all apperars to be much the same to me! c joe Dear CDS Critic:

It appears we Citizens are obsessed with the Blame Game, when we get the perpitrator properly identified, we can then go about perfecting the “Cure.!”
Well guess what? Will that bring back ENRON? Bear Sterns? Bernie Maloof’s lost fortunes? AIG’s Missteps? GM/Chryslers financial crisis? The banking Crisis? The Housing Crisis?
It appears to me, that Government’s Cures for the ills that face us, are proving to be more impotent, than the very ills that face us?
When this crisis is all over, we will be left with monutains of ill conceived debt, that we plunged into, because our leadership said we must. Our leadership in Washington, is
IMPOTENT, TOO!
The Resolution Trust Company, successfully dealt with the last mortgage crisis, as did other, “Focused Approaches,” in earlier times. Why do we not emply “Tried & True Remedies?”
We cannot, “Spend our way out of a poorly constructed Economy Built upon Foolish, Out of Control SPENDING?
CHANGE CHANGE CHANGE INDEED! It all apperars to be much the same to me!
c joe

]]> By: CDS Trader http://www.moneymorning.com/2009/03/04/credit-default-swaps-4/comment-page-1/#comment-17185 CDS Trader Fri, 06 Mar 2009 14:11:40 +0000 http://www.moneymorning.com/?p=5345#comment-17185 "The problem is that the CDSs were sold (and bought) with very complicated mathematical models that were not perfect. So instead of selling the exposures to credit just once, it was sold 10 to 20 times (of the underlying asset) by investment bankers." You have not explained why this is a problem. It's called *hedging*. "The SEC did a probe of the CDS market in late 2008 and found the cost of default insurance for Bear Stearns and Lehman spiked in the days before these wall street firms collapsed." Well obviously the CDS spiked. The market saw that the two companies were in trouble so people rushed to buy protection to cover their losses! I think it's an interesting discussion to be had regarding whether this creates positive feedback loops, but for Fuld/Cayne to complain about short-selling/CDS is pretty hypocritical given they are the two most important risk management tools in a bank's armoury. "He estimates that the CDS market is $35 to $65 TRILLION and its unregulated." See my post above. DTCC releases weekly data on the size of the CDS market (http://www.dtcc.com/products/derivserv/data/index.php?lpos=home_splash_promo&lid=index.php) and it is currently around $28 trillion. However, as per my post above, this is a *notional* value. If you don't appreciate what this means then frankly you have no place discussing the pros and cons of derivatives. "Do not even think about asking any European bank what they think of CDSs, as they have lost billions on these instruments." Erm, this is just complete crap. European banks such as Deutsche, Credit Suisse are two of the world's biggest CDS dealers and have *made* billions from them. "they are financial weapons of mass destruction and have been toxic investments for many banks." In my opinion, just because you *can* lose lots of money on investments doesn't mean they should just be banned outright. CDS are a vital hedging tool and help the easy flow of credit in the economy. It's true that a massive speculation market has grown up around them, but this is an inevitable consequence of any market. Do you own stocks? I'm guessing you don't buy majority stakes to control the company, so all you're doing is speculating! “The problem is that the CDSs were sold (and bought) with very complicated mathematical models that were not perfect. So instead of selling the exposures to credit just once, it was sold 10 to 20 times (of the underlying asset) by investment bankers.”

You have not explained why this is a problem. It’s called *hedging*.

“The SEC did a probe of the CDS market in late 2008 and found the cost of default insurance for Bear Stearns and Lehman spiked in the days before these wall street firms collapsed.”

Well obviously the CDS spiked. The market saw that the two companies were in trouble so people rushed to buy protection to cover their losses! I think it’s an interesting discussion to be had regarding whether this creates positive feedback loops, but for Fuld/Cayne to complain about short-selling/CDS is pretty hypocritical given they are the two most important risk management tools in a bank’s armoury.

“He estimates that the CDS market is $35 to $65 TRILLION and its unregulated.”

See my post above. DTCC releases weekly data on the size of the CDS market (http://www.dtcc.com/products/derivserv/data/index.php?lpos=home_splash_promo&lid=index.php) and it is currently around $28 trillion. However, as per my post above, this is a *notional* value. If you don’t appreciate what this means then frankly you have no place discussing the pros and cons of derivatives.

“Do not even think about asking any European bank what they think of CDSs, as they have lost billions on these instruments.”

Erm, this is just complete crap. European banks such as Deutsche, Credit Suisse are two of the world’s biggest CDS dealers and have *made* billions from them.

“they are financial weapons of mass destruction and have been toxic investments for many banks.”

In my opinion, just because you *can* lose lots of money on investments doesn’t mean they should just be banned outright.

CDS are a vital hedging tool and help the easy flow of credit in the economy. It’s true that a massive speculation market has grown up around them, but this is an inevitable consequence of any market. Do you own stocks? I’m guessing you don’t buy majority stakes to control the company, so all you’re doing is speculating!

]]> By: Adam Smith http://www.moneymorning.com/2009/03/04/credit-default-swaps-4/comment-page-1/#comment-17166 Adam Smith Fri, 06 Mar 2009 05:03:06 +0000 http://www.moneymorning.com/?p=5345#comment-17166 You can check out how credit default swaps became the accelerant for the current financial crisis at several financial news networks, Bloomberg, Financial times and Seeking Alpha. CDS was supossed to be a financial instrument to transfer risk. The problem is that the CDSs were sold (and bought) with very complicated mathematical models that were not perfect. So instead of selling the exposures to credit just once, it was sold 10 to 20 times (of the underlying asset) by investment bankers. The SEC did a probe of the CDS market in late 2008 and found the cost of default insurance for Bear Stearns and Lehman spiked in the days before these wall street firms collapsed. Frank Partnoy(a former derivatives broker) stated,when asked about what part the CDSs played in the financial crisis, "they were the centerpiece, really". "That's why the banks lost all the money"(60 miniutes). The CDS market is unregulated and not trasnparent so few people in the CDS chain knew the financial stability of everyone else in the chain. Read Professor Greenberger's article on regulatory reform. He estimates that the CDS market is $35 to $65 TRILLION and its unregulated. Check out the article by GH bank on "Credit Default Swaps Almost Bring Down Global Financil System". Do not even think about asking any European bank what they think of CDSs, as they have lost billions on these instruments. When the real world has lost billions on CDSs, they are financial weapons of mass destruction and have been toxic investments for many banks. You can check out how credit default swaps became the accelerant for the current financial crisis at several financial news networks, Bloomberg, Financial times and Seeking Alpha. CDS was supossed to be a financial instrument to transfer risk. The problem is that the CDSs were sold (and bought) with very complicated mathematical models that were not perfect. So instead of selling the exposures to credit just once, it was sold 10 to 20 times (of the underlying asset) by investment bankers. The SEC did a probe of the CDS market in late 2008 and found the cost of default insurance for Bear Stearns and Lehman spiked in the days before these wall street firms collapsed. Frank Partnoy(a former derivatives broker) stated,when asked about what part the CDSs played in the financial crisis, “they were the centerpiece, really”. “That’s why the banks lost all the money”(60 miniutes). The CDS market is unregulated and not trasnparent so few people in the CDS chain knew the financial stability of everyone else in the chain. Read Professor Greenberger’s article on regulatory reform. He estimates that the CDS market is $35 to $65 TRILLION and its unregulated. Check out the article by GH bank on “Credit Default Swaps Almost Bring Down Global Financil System”. Do not even think about asking any European bank what they think of CDSs, as they have lost billions on these instruments. When the real world has lost billions on CDSs, they are financial weapons of mass destruction and have been toxic investments for many banks.

]]> By: Bob Sandridge http://www.moneymorning.com/2009/03/04/credit-default-swaps-4/comment-page-1/#comment-17132 Bob Sandridge Thu, 05 Mar 2009 17:40:34 +0000 http://www.moneymorning.com/?p=5345#comment-17132 The problem is 'making money'. If the day traders, thoughs that roll the stocks for daily, weekly and other short term gains, abusing the work of Wall Street, go some place else, the true investors could build retirement equity and watch for value and company (new and old) growth. The government is so self serving that anything goes and investor be ware. Why can't they be honest and admit ''it's not 'public servant' but self serving". It takes drive to get a head and Bill is King. If Obama succeeds 'praise the Lord', if not, thanks to the politicians and the Wall Street crowd. I'll die, thanking God for a great life as an American and looking foward to seeing the day traders, politicians, lawyers and bankers in the 'tribulation'. Gods mercy, forgiveness and grace on all. Bob S. The problem is ‘making money’. If the day traders, thoughs that roll the stocks for daily, weekly and other short term gains, abusing the work of Wall Street, go some place else, the true investors could build retirement equity and watch for value and company (new and old) growth. The government is so self serving that anything goes and investor be ware. Why can’t they be honest and admit ”it’s not ‘public servant’ but self serving”. It takes drive to get a head and Bill is King. If Obama succeeds ‘praise the Lord’, if not, thanks to the politicians and the Wall Street crowd. I’ll die, thanking God for a great life as an American and looking foward to seeing the day traders, politicians, lawyers and bankers in the ‘tribulation’. Gods mercy, forgiveness and grace on all. Bob S.

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