McCain advisor spurred $62 trillion derivatives market that will swamp global markets

[Ichingcarpenter]

Lurking in the background of this weekend's collapse of two of Wall Street's biggest names, is a $62 trillion segment of the $450 trillion market for derivatives that grew huge thanks to John McCain's chief economic advisor, Phil "Americans are Whiners" Gramm. That's because in December 2000, Gramm, while a U.S. Senator, snuck in a 262-page amendment to a government re-authorization bill that created what is now the $62 trillion market for credit default swaps (CDSs).

I realize it is painful to read about yet another Wall Street acronym, but this is important because it will help you understand why the global financial markets are collapsing. And it will give you information to consider when you vote in November. CDSs are like insurance policies for bondholders. In exchange for a premium, the bondholders get insurance in case the bondholder can't pay. As I posted, in the case of the $1.4 trillion worth of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) bonds, the government's nationalization last Sunday triggered the CDSs on those bonds. The people who received the CDS premiums are now obligated to deliver those bonds to the ones who paid the premiums.

Gramm's 262-page amendment, dubbed "The Commodity Futures Modernization Act," according to Texas Observer, freed financial institutions from oversight of their CDS transactions. "Prior to its passage, they say, banks underwrote mortgages and were responsible for the risks involved. Now, through the use of -which in theory insure the banks against bad debts-those risks are passed along to insurance companies and other investors," wrote Texas Observer.

How does this relate to Lehman's bankruptcy? " were a key factor in encouraging lenders to feel they could make loans without knowing the risks or whether the loan would be paid back. The Commodity Futures Modernization Act freed them of federal oversight," according to Texas Monthly. And it was due to these CDSs that Wall Street held an emergency session yesterday to try to minimize the damage of Lehman's CDSs and other derivatives. Unfortunately, this session did not produce much thanks to the built-in lack of knowledge of the risks in these transactions that Gramm's legislation ensured.

http://www.bloggingstocks.com/2008/09/15/100-year-crash-mccain-advisor-spurred-62-trillion-derivatives/

[Old and In the Way]

1. Phil Gramm = McCain's top economic adviser = #1 suspect for the US economic meltdown.

Could it be any clearer?

[Ichingcarpenter]

2. I think the article brought up something most don't talk about

and that is the CDSs transactions ..... we need to start paying attention to this.

[speedoo]

3. Phil Gramm: McBush is desperately trying to disassociate from him.

Won't work, McBush. You are screwed.