Untangling credit default swaps VIDEO

[Joanne98]

http://www.youtube.com/watch?v=DdEI6PkGZK8&NR=1

It's 10 minutes long. Pretty interesting

[Tab]

1. I didn't watch it (no offence) but I don't think they're supposed to be complicated

My understanding is that it's effectively private insurance given to a major lender to secure their loans. The insurer (probably AGI) doesn't really expect their major lender (e.g.: GMAC) to have problems, so they insure the loans. Even if one company has problems for some reason, which may even cost them billions, they didn't really expect the whole frickin' industry to try to collect at the same time. It's an easy way to print money, so to speak. The lender is comfortable because they're "insured" (against a default on credit) and their exposure is minimized, and on the other end of the deal, the insurer is comfortable because they don't really expect to have to bail out GMAC, so it's like free money. Except, as we all know now, risks, though seemingly farfetched, can come true. Poof, gone.

If I'm not understanding it properly, let me know and I'll watch the vid, but the above is basically how I've come to understand the situation.

[truedelphi]

2. He gave somewhat of a clear presentation of a complex

Problem. His discussion gives people at least somewhat of a way to think of things.

But I thought his analogy of the Ferrari was rather a poor choice. For one thing, a Ferrari has an absolute value, called a blue book value. This value is not subject to alteration. In other words, a group of people can not wake up one day and decide to "short" the value of that Ferrari. (A Trillionaire, could of course, buy up all the Ferraris out there, and crush them all, leaving only one, which probably would make that one Ferrari extremely valuable), but other than that, a car has a market value and no one can "short" that value.

But one thing we now know was happening (and Kucinich and Issa discuss this when they grilled Kashkari) is that people with vested interests went ahead and put "shorts" on certain companies to undermine the value of those certain companies and thus cause their collapse.

The ramifications of THAT is that now there are properties that might have remained solvent were it not for this ability to "short" a company's value. And it alsomeans the overall number of companies that we the taxpayers have to bailout is much higher than it needed to be.

Secondly, the person giving this lecture fails to discuss an extremely important concept - he states that Credit Default Swaps were simply Insurance.

But aha! If these CDS's were just insurance, than why the heck didn't the overall insurance regulating industry take over and examine them?????????

Even though the the CDS's were called something other than insurance, why should that change how the regulating agency viewed them. You or I could not call a medical device that we were too lazy or cheap to put up to the FDA by some other word - say use the word "novelty item" rather than medical device. there have already been people who have paid fines and gone to jail for that.

And I cannot call my bag of weed "oregano" when the cops search my car - it remains "Weed" and I could well be charged for that too.

I would love to know how it is that these CDS's instruments were not looked at by the insurance regulators. And so far, I am the only one out there asking this question!!

Something was pretty fishy in this whole scheme of things.

[sam sarrha]

3. just declare all cds's null and void,, pay back the premium..cheaper

[Believing Is Art]

4. Not bad

It's very simplified, and I disagree with him on one major thing - I think CDS's are the biggest reason for the economic failure.

He also only touches on the betting aspect of CDS's. I think he should have gone into that more because it's so integral in understanding the crisis.

In case anyone hasn't read it, this article is lengthy but very good: http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom#page1