09/25/2008 02:47:12 PM EST

Credit default swaps ( Fixing the world series was for kids)

posted by Scotty12

How to rig a market and crash the world

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OK your a "Mortgage broker".
You design a mortgage that is guaranteed to default  say, no money down 2 percent interest for 2 years then 12 percent.

Having made sure the mortgage will definately fail you then buy a CDS on it worth twice or ten times the mortgage paying the 3 year premium for it by selling the mortgage as a Mortgage backed security. Do this as often as you can.

wait for gauranteed fail of the mortgages you sell and make a fortune!

SNAG every other crooked mortgage broker did the same thing hence the twits that sold you the CDS go bust they could sell you a CDS without ever showing they could pay if it was triggered Multiply this by a few thousand instant banking collapse.

Even the bookie "shadie Joe" at your local is not daft enough to run a book where he only takes bets on one side. Only an unregulated Wall Street is that stupid!

Here is an alternative to the bailout. Congress passes a law declaring all CDS to be illegal if the value of any CDS or any group of CDS on a single entity exceeds 50 percent of the original value of the entity. Treat anything over that as illegal the way drug profits are. The government already has the right to seize any RICO assets or drug assets. This is even more crooked and declaring over leveraged CDS illegal instantly removes the liability on the banks while also wiping out the paper profits of the crooks.

Worth a thought?
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Credit default swaps ( Fixing the world series was for kids) | 3 comments (3 topical, 0 hidden)
Bingo! You got It! (none / 0)

For those of us who have been wondering why it is costing us $700 Billion to bail out the banks, when the entire face value of every subprime loan ever sold is probably not much more than that, we really aren't bailing out the subprime loans.

If we were bailing out subprime loans, we could make arrangements with the homeowners to keep their homes, they would pay the banks, and everything would be fine.  I brought this up in this forum a few times, and nobody has yet taken the bait and connected to CDS's.

But the secret that Paulson, Bush and everyone else isn't talking about is that we aren't really bailing out defaulted home loans.  We are bailing out companies who lost money buying and selling these high-risk and highly-leveraged Credit Default Swaps, that barely retained any relationship to the subprime loans they were supposed to be guaranteeing.

By the end of 2007, there were an estimated $45 to $62.2 trillion dollars worth of Credit Default Swap contracts in circulation.  And these contracts presumably were created to protect, maybe, $1.5 trillion in subprime loans.  In fact, many economists conjectured that the reason these subprime mortgages were created was to provide fodder for CDS's.  The subprime loans were the pitbulls in the ring.

In other words, CDS were the poker chips in a high-stakes gambling casino.  And these huge investment banks, and even deposit banks, were becoming addicted to the thrills of the game.

It is now estimated that the major US banks could be $3 trillion in debt for CDS contracts they cannot pay off, and whoever owns these contracts are holding the US economy hostage by demanding their money.

$700 billion might be just the tip of the iceberg compared to what it might take to pay off these gambling debts.

What I want to know (and Paulson and Bush will never tell us), who owns these CDS contracts that have come due, and why are they holding the US economy hostage?  What will it REALLY take to keep them at bay?

by rbruck on 09/25/2008 03:12:03 PM EST

I forgot to mention... (none / 0)

Your suggestion to retroactively declare CDS's with > 50% value to the subprime loan to be illegal, and thus null and void, would likely fix the banking crisis.  And there IS precedent in US law for doing something like that to similar financial instruments.

Obviously the reason we are not considering your solution is related to who it is our banks owe the CDS money to.  The Saudis?  China?  Halliburton?  What other leverage do they have over the US government?  If we can figure that out, we will know why we are spending $700 billion to quiet them down.

by rbruck on 09/25/2008 03:22:04 PM EST

Rico statute-esque (none / 0)

Yes the question on who owns the CDS' may be another scandal in itself.

Never-the-less, It is easily within the power of the government to declare CDS over value as illegal, If they want to be especially fair they could  default the CDS value but return the premium in the same way as an insurance company does if there is a dispute over an insurance discosure. Say you insure your car against theft but dont disclose that although your neighbourhood is safe your girlfriend lives in "the hood". The insurance company might disqualify your claim but have to pay back the premium. Or even more on point you insure your car with two companies. In that case currently either the two companies share the payout or one company defaults and returns your premium. If you try to claim from both in the full amount you end up in jail for fraud. That is what whould happen to crazy CDS over purchasers

Clearly this would cause a vast drop in apparent paper "wealth" for some. The question is are any financial firms assets entirely in CDS paper? If so I would say they are so clearly insane that they and all their investors deserve what they get.

These "weapons of mass financial destruction" representing a Quadrillion dollars in the world markets CAN not be real in a world economy of only 62 trillion. Clearly a quadrillion dollars was never PAID for these intruments the notional value depends on assessing all the "bets" as wins.

If the entire market is delcared illegal no actual money can come out of the real economy since no money from the real economy exists in the notional quadrillion value of the derivatives. A whole lot of people will be pissed off of course but the credit market would not dry up because the banks would not be chasing credit each day to voce margin calls on the derivatives and there would actually be again a vast amount of cash sloshing around looking for a home.

Currently because of the fear that one bank or another will be swallowed by margin calls on CDS cash is flooding Tbills at near and sometimes below zero return. Get rid of the derivative bomb by declaring multiple value CDS on single entities illegal and the problem is over. You have to completely re structure the world economy of course but

details details!

 

 

by Scotty12 on 09/26/2008 11:29:12 AM EST

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Credit default swaps ( Fixing the world series was for kids) | 3 comments (3 topical, 0 hidden)
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