Comments on: Credit Default Swaps 2

By: archelonprime

archelonprime — Sun, 01 Nov 2009 04:32:06 +0000

I don’t know what’s …
I don’t know what’s more laughable, the very concept of credit default swaps/derivatives or the people that defend them.

By: ObsessiveDetailer

ObsessiveDetailer — Sun, 01 Nov 2009 04:32:06 +0000

So notional values …
So notional values aside, what is the real sum of the CDS market worth? A lot less?

By: DiltonDalton

DiltonDalton — Sun, 01 Nov 2009 04:32:06 +0000

Yes it is indeed …
Yes it is indeed mind boggling. What is even more mind boggling is that the federal government under George the 3rd actually passed laws to prevent this practice from being regulated. An industry that was bigger than all the banks and all the mortgage companies and in fact larger than the entire economy of the USA was allowed to run wild with nobody watching. Good old George said, in jest, “Why did this have to happen on my watch?” Of course the answer is that he & his crew weren’t watching.

By: JoshuaSethComposer

JoshuaSethComposer — Sun, 01 Nov 2009 04:32:06 +0000

“The CDS allows the …
“The CDS allows the equivalent of buying fire insurance on your neighbor’s house. In fact it is like insuring your neighbor’s house N times. This situation is not legal for several reasons. First it is insuring where there is no risk. Second it makes it tempting to set your neighbor’s house on fire.”

Agreed. But are we sure this is what was going on? The magnitude of the absurdity is so mind-boggling that it’s really hard to believe. The tooth fairy has more credibility.

By: eswarifcai

eswarifcai — Sun, 01 Nov 2009 04:32:06 +0000

Hey Khan,
…
Hey Khan,
Absolutely love your vids on swaps. There is a currency swap deal struck by the Fed recently. Any videos on that?

By: efh0888

efh0888 — Sun, 01 Nov 2009 04:32:06 +0000

See the whole point …
See the whole point of finance and risk management is to make as much potential return without taking on additional risk. AIG (among many others) seems to have missed the boat on that concept.

These CDS’s were so mispriced because of certain assumptions made by those pricing them (i.e. that correlation among different credit default risks is always constant when in fact it is not, especially in times like these).

If actuaries had done the pricing, we might not be in this situation

By: drobberbaron

drobberbaron — Sun, 01 Nov 2009 04:32:06 +0000

But why would the …
But why would the insurer give insurance to people who hadn’t made a loan on companies that some hedge funder thought migfht fail? Are they stupid?

By: bobbyv364

bobbyv364 — Sun, 01 Nov 2009 04:32:06 +0000

You can thank Phil …
You can thank Phil Gramm who on December 15, 2000, rushed through the Commodity Futures Modernization Act of 2000, which Because of the swap-related provisions of Gramm’s bill, a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

By: IndyFlick

IndyFlick — Sun, 01 Nov 2009 04:32:06 +0000

Seems like I2 would …
Seems like I2 would simply buy the bonds of B2, for cents on the dollar, and continue to make payments to P1. Even if they paid par, it would save them $8B ($10B CDS – $2B Par).

By: johnny1436

johnny1436 — Sun, 01 Nov 2009 04:32:06 +0000

excellent
excellent