October 01, 2008
The Whirlpool

This is part one of Bad Attitudes’ meltdown primer. The article is by Ben Stein, movie star and financial writer. (H/T to Xymphora)

These Credit Default Swaps have been written (as insurance is written) as private contracts. There is nil government regulation of them. Who writes these policies? Banks. Investment banks. Insurance companies. They now owe the buyers of these Credit Default Swaps on junk mortgage debt trillions of dollars. It is this liability that is the bottomless pit of liability for the financial institutions of America.

Because these giant financial companies never dreamed that the subprime mortgage securities could fall as far as they did, they did not enter a potential liability for these CDS policies anywhere near their true liability — which again, is virtually bottomless. They do not have a countervailing asset to pay off the liability.

This is what your humble servant, moi, missed. This is what all of the big investment banks and banks and insurance companies missed. This is what the federal government totally and utterly missed. This is what the truly brilliant speculators in these instruments did not miss. They could insure a liability they could also create and control. It is as if they could insure a Cadillac for its value upon theft — but they could control what the value the insurer had to pay off was. The insurer thought it might be fifty thousand dollars — but it was manipulated into being two million.

This is the whirlpool sucking down finance.



Posted by Jerome Doolittle at October 01, 2008 05:05 PM
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I can recommend this article that makes the point that "the market for credit default swaps is larger than the entire world economy."

Then you realize that they're taking out credit default swaps on the US Treasury bonds!

I know the Senators from New York, um Wall Street are both gung ho for this thing and can barely wait for the infusion of campaign contributions, um bribes that will result. We can only hope that Pelosi will fail in her attempt to ignore the Dems and get the Repub wingnuts on board.

Posted by: Charles on October 1, 2008 6:59 PM

I may be a fucking nobody but I sure as hell didn't miss it. I exited the stock market and all non-FDIC/FCU insured investments summer 2002 and haven't looked back. My wife's 401K actually made a little money last quarter as she listened to me & not experts like ol' Ben. And now my tax dollars and future hopes for usable mass transit, universal health care & true energy independence are going up in smoke to bailout smug pompous assholes like Mr. Ben Stein? [seethe] http://www.timesonline.co.uk/tol/news/world/asia/article4810644.ece

Posted by: darms on October 2, 2008 11:12 AM

Here's an economist I mostly respect on Ben Stein as world's worst financial advisor: http://bigpicture.typepad.com/comments/2008/08/august-2007-ben.html

Posted by: Joyful Alternative on October 3, 2008 10:27 PM
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