It has always been the American Way to point the finger of blame whenever something bad happens. It is just our nature.
Unfortunately, I am no different...my only problem is that I don't have ENOUGH fingers to point the blame at...(sorry for ending with a preposition)
This current financial crisis has many villains. It started in 1995, when then Federal Reserve Chairman Alan Greenspan endorsed the use of credit derivatives (Credit Default Swaps) as a means of creating additional revenues for the banking industry (which smacks of a conflict seeing that he works for the banking industry).
Warren Buffet had once warned that Credit Derivatives were, "Instruments of Mass Financial Destruction..."
In essence, Credit Default Swaps (CDS) are bets. A buyer of a swap is buying insurance from a seller of the swap against the default of a bond or note that the buyer currently holds. The buyer pays the seller a "premium" for this insurance. In the case of a default, the buyer goes to the seller to be made whole. This all is fine and good as long as the seller has the capacity to pay the buyer for his loss but when cannot pay then it is "Houston, we have a problem..."
Highly leveraged gambling on CDS's created monumental amounts of premium revenue income to the brokers, investment banks, insurance companies (like AIG), and hedge funds involved in this Las Vegas style of financial feeding frenzy.
It has been estimated that the total notional value of the Credit Derivatives outstanding contracts are in excess of 1.4 quadrillion dollars!
That is a thousand trillion. It is 10x the U.S. GDP or 2x the entire worlds GDP!
Yikes!
The $400 billion bailout, unless carefully managed and regulated, will not be sufficient to bring us out of this mess...especially when you consider the Treasury Secretary Henry Paulson was Goldman Sach CEO prior to his appointment...hmmmm....
For more info on the role of CDS's in the crisis read Ellen Brown's great take on this whole mess.
ttfn,
Jeff
3 comments:
It is a scary mess. Thanks for helping me find out where to point my fingers. :)
P.S. I met a woman who works for Fannie Mae the other day. Poor lady, when she told me this just cringed. Not a popular place to work these days. :(
Thanks Citimama...
Fannie Mae and Freddie Mac were both bailed out by the Fed without the benefit of any congressional hearings...they could not afford to let them fail.
J.
Crazy! I thought derivatives were a simple mathematical operation that could be negated simply by taking an integral.
From your perspective, has the market, as far as housing in CA, hit bottom? Speculators have said it HAD hit bottom around July and SoCAL saw a 60% housing increase, yet this was before the bail out and the recent anemic Wall Street. Should I buy I house now, or hold out for a Hooverville?
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