Back in February 2008 I asked: "Have the world's major banks fallen into the very trap that sank Enron?" I was referring to Enron's use of super-complicated financial transactions. Sunday
CBS' Sixty Minutes broadcast an interesting
investigation into the roots of the financial crisis. Referring to the means by which high-risk home mortgages became popularly traded, one expert interviewed remarked:
"The instruments themselves are at the heart of this mess."
However, today the explosive problem lies down the transaction chain from those overly-complicated instruments. It is Credit Default Swaps -- which banks bought as an unregulated and under-financed form of insurance contract against purchases of dodgy mortgage-backed securities -- that have brought the international financial system to the brink of catastrophic. So Credit Default Swaps served both as investments and as a means to insure purchases of mortgages. These are not backed up as insurance policies are by large reserves of cash.
And their popularity has skyrocketed recently. A table provided by the
Bank for International Settlements shows that the Credit Default Swaps grew from only $13 trillion in December 2005 to $58 trillion in December 2008 (to put this figure in perspective, estimated
world GDP for 2007 was $65 trillion). CDS were sold by all the firms that have collapsed or been bought out: Lehman, Bear Stearns, etc. This "shadow market" is unregulated.
Do you have a Private mortgage insurance (PMI) policy? If you do your PMI insurer has passed along their risk by buying a credit default swaps (CDS) to protect them in the event you have your home that your home is taken away from you. CDS and PMI are the same thing. Make people wanting to buy a home put at least 20% down if you don't like them. nomedals.blogspot.com
ReplyDelete