Just notes I took while reading GRETCHEN MORGENSON’s most recent article explaining the current financial mess: A Window in a Smoky Market.
1. New Accounting rules set to take effect November 15; conspicuously close to the election. Sure makes it easier to spin the subsequent crash caused by this rule change as “Election” related.
2. Simple explanation: Sell one risk but buy another. The CDS buyer assumes the risk of “seller” defaulting rather then underlying investment defaulting. In practice, paying Goldman Sachs 1% to sell a CDS backed by Bears Stearns rather then holding a bond backed by GM, Exxon or other company.
3. The first failed CDS that cannot be settled amicable, will roil the markets.
4. If you owned default protected (a basic CDS) and also owned the asset then you had to disclose the details. If you don’t hold the asset but are merely “making a bet” for or against a companies default, then no disclosure is necessary. No surprise the market with non-disclosure grew from “133 billion three years earlier” to more the $2 trillion today (31% annual growth).
Categories: Finance · Trust
Tagged: cds, Grifters, Shadow Market
It is difficult to get a man to understand something when his salary depends upon his not understanding it. – Upton Sinclair
The following link is worth the time if you want to know what’s going on financially in layman’s terms.
Terry Gross NPR interview with Michael Greenberger of the University of Maryland
http://www.npr.org/templates/story/story.php?storyId=89338743
Highlights
a. Prof. Greenberger compared the major issue right now to banks placing bets on a basketball game and then booking the winnings as assets, even though the game hadn’t even been played yet.
b. Credit Default Swaps are technically insurance but specifically misidentified as NOT insurance to avoid State regulations. Now I understand why Paulson announced a “federalization” of insurance regulation as part of the “reform” to prevent this in the future. Sounds like the same tactics as the EPA disallowing California’s regulation of pollution.
c. Problems just starting because the same problems found in sub-prime mortgages also infect credit cards and other debts. Current problem may be the “canary in the coal mine signally and greater problem”.
d. These bets, not only uncertain in their outcome, are not even known because the financial firms are way behind on paperwork. To paraphrase Professor Greenberger, it’s like a bookie taking hundreds of bets but not writing any of them down. Fun huh.
e. Phil Gramm seems to be at the root of all legislative failures, basically removing regulations, in the late 1990’s that paved the way for these problems (now John McCain’s chief economic advisor’s)
Much much more of course, enjoy and be prepared.
Categories: Finance
Tagged: cds, npr, sub-prime, terry gross
