It's Bigger Than The U.S. Stock Market, It's Unregulated, And You've Never Heard Of It

Unless you’re one of those fancy business people who read this blog you’ve probably never heard of credit default swaps. The NYT explains:

Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companies’ finances. Like a homeowner’s policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.

The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.

No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity.

Apparently “unregulated” when used here here is code for “like, if the stock market were run by craigslist.” Buyers aren’t even sure who is supposed to pay their claim, says the NYT.

It would be as if homeowners, facing losses after a hurricane, could not identify the insurance companies to pay on their claims. Or, if they could, they discovered that their insurer had transferred the policy to another company that could not cover the claim.

“This is just a giant insurance industry that is underregulated and not very well reserved for and does not have very good standards as a result,” said Michael A. J. Farrell, chief executive of Annaly Capital Management in New York. “I think unregulated markets that overshadow, in terms of size, the regulated ones are a real question mark.”

Oh yes, this is obviously an excellent idea.

Arcane Market Is Next to Face Big Credit Test [NYT] (Thanks, trai_dep!)
(Photo:Getty)

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  1. bustit22 says:

    I know how we can fix this!! More goverment regulations! Vote Obama in 2008!!

  2. Aphex242 says:

    @bustit22: Not to be a complete troll, but it kills me when conservatives say they’re for smaller government yet they can’t seem to stop using the words “Constitutional” and “Amendment” together in the same sentence.

    Smaller government my ass. And I think everyone here would agree that a little more oversight of the mortgage industry over the last, I don’t know, 8 years or so would have been a good thing, no?

  3. bishophicks says:

    No, no more regulation. The market magically fixes itself in these situations, just like we’ve seen with the whole sub-prime mortgage meltdown that is expanding into all corners of the financial industry across the globe. It’s obvious to anyone with a brain that greater regulation and oversight of the industry would have made things much worse.

  4. JohnMc says:

    Actually the NYT article has it only half right. A CDS is an agreement by one party to assume the balance sheet risk for another, usually a bank, on a single holding or a suite of holdings. But it is NOT insurance as the article presumes. Example:

    Two banks agree to fund construction a big high rise. The builder will have performance insurance and when the building is standing the owner will have building insurance as well. But the banks? Well they have some risk however slight. They also have reserve requirements to be met. If the bank wishes they can have a third party assume that risk for periodic payments. That takes the risk off their balance sheets reducing their reserve requirements. And the periodic payments are less than the reserve requirements on a ROI basis.

    So the problem? Well the securities firms offering the CDS (and CDOs) hedged too far. So when a hedge fund loses half its value due to the subprime meltdown their ability to carry the risks of the banks falters. The banks knowing this are now in a panic as they have to be prepared to up their reserves, ie capital, in monies they don’t have. So they could be in technical federal default. But this is all old hat and has been going on for a year.

    The latest disaster that is about to unfold is in the muni bond market. The underlying bond management is probably technically insolvent because they too dabbled in the subprime securitization market. Kicker here is under the nature of muni market the long term bonds are treated like short term instruments. One can bid on the bonds in the given interval. So one could bid on Port Authority of NJ bonds Chinese auction style. You get your percentage the PANJ pays that rate plus a mgt fee. Well these instruments have a provision — no bidder then the rate automatically goes up to the agreed rate that can be 12-20% depending on what was signed for.

    So imagine, your school board floated one of these bonds (quite common actually) and nobody bids as bidders are afraid of the underlying risk. The bond has a 20% kicker rate. If the district had been paying 5% their budget just got whacked by a 4x increase. How do they cover it? In some cases they may not be able to. In other cases schools would have to eliminate programs, schools and teachers.

    CDO/CDS affects Wall Street. Technical defaults on muni issues will affect both Wall Street and Main street. By the way Warren Buffet has an offer on the table to cover much of these issuers for a deep percentage of the original holding.

    Meg this is the one to watch.

  5. savvy999 says:

    500 years from now ‘free market’ economists will be mocked like alchemists. They had such great ideas– Pb to Au, ‘non-regulated, self-correcting markets’– but sooooo impractical in the face of reality.

  6. Sometimes I wonder if the CDS market was created because a few smart and powerful people knew that housing and oil prices would create this inevitable mess.

    Kind of like the health insurance boom that happened when insurers realized Americans were a bunch of fatasses.

    Oh well.

  7. wfpearson says:

    You fools, the market is self regulating. If you don’t know how you’re going to get paid in the end, then you shouldn’t be buying the security. I don’t need mommy or daddy government telling me which investments to buy. I can read and do my own research. If I want to put money in a risky investment in hopes of a big payoff, then that is my choice and I shouldn’t have big brother protecting me from the consequences (or benefits) of that choice. After the fallout, maybe people will shy away from these type of investments. That’s a good thing. The last thing we need is for government “reforms” to lend an aire of safety to these investments, only to get burned again because of some “oversight.”

  8. JohnMc says:

    APHEX242, it kills me when a liberal pontificates about what they know nothing of. Very little is at issue here in the mortgage industry. Every loan offered had to meet the then federal requirements for disclosure. “I can teach it to you, but I can’t learn it for you.” is apt. If someone was stupid enough to agree to a mortgage that was 75% of their income then woe is to them. As a buyer they has responsibility to make sure they could cover the note. The fact that defaults are up for mortgages that only 3 months old is an indication that buyers are not looking at budgets. That is not the banking industries fault.

    The issue in the subprime market is in the secondary funding market that securitized the loans for sale to third parties.

    By the way, it was Congress that back around 1999-2000 encouraged banks to loosen their loan requirements. Rangel (D) was a big proponent of this and had the clout to make it happen being on the Ways and Means, and Taxation committees. Democrat in a Democratic Congress.

  9. donovanr says:

    The difference between losing money in a well run market and in a poorly run market is that the first is caused by stupidity and the latter usually due to a scam. The difference between the two is information. If you have access complete information and you lose money it is largely due to stupidity but if people are holding back information and they take your money then you have been scammed.
    Amaranth is a great example. At one point they owned something like 25% of the gas futures which had driven up prices. Then the moment the market discovered they were artificially raising prices the market killed Amaranth. This is how markets are supposed to work.
    The key to a great market is that all parties have comprehensive and equal access to information. That is what should be regulated; Access to information, not rules to protect the stupid.

  10. PeteyNice says:

    @JohnMc: Uhh in 1999-2000 the House (of which Rengel is a member) had a Republican majority.

    As a loaner the banks have a responsibility to their shareholders to ensure that loans they make can be paid back. Giving someone a loan that consists of 75% of their salary every month lowers the chance of the loan being paid back.

  11. JohnMc says:

    Sorry, SAVVY999, but the securitization market would have worked properly. That market assumed a certain 1-3% default rate from mortgage holders. But home buyers got greedy and reached for more than they could afford. Defaults in some markets reached 10% and that caused the backend securities market to falter.

    Greed on the retail side was at fault for most of this. Read history, any bubble market has to bust. It was true in the 1600’s in dutch tulip bulbs as it is in US housing markets. Once a product exceeds its intrinsic value it must come down eventually.

  12. DoctorMD says:

    “Smaller government my ass. And I think everyone here would agree that a little more oversight of the mortgage industry over the last, I don’t know, 8 years or so would have been a good thing, no?”

    It was regulation that got us into this mess of overpriced houses: Artificially low interest rates, gimmick mortgage terms, deductible interest, and forced loans to poor minorities. All courtesy the government trying to float the economy.

  13. @JohnMc: I agree that it is the banks and subprime mortgage holder’s fault in some cases, but I think there are a few external issues going on that are exacerbating this recession. In fact, some ARMs are adjusting down, but people are still defaulting.

    Inflation for utilities, health care and transportation are out of control. We’re losing “working” class jobs at unheard of rates. All of this has been going on way back through the nineties (you’re correct about it being a democrat issue as well), but people have been able to use their houses as ATMs to cover up the fact that life isn’t as affordable as it used to be.

    If I were a bank, I would have been listening more closely to how the average American was financially living. I don’t really blame them, because most of these banks were based in NYC, which is really another world than, say, Stockton. People using houses as investments, and real estate agents inflating prices should have been huge red flags to banks to pull back on lending.

    But hey, I’m all with you on the survival of the fittest mentality. The economy is changing, and we’ve had plenty of notice to make adjustments.

  14. JohnMc says:

    PETEYNICE, first of all its lender, not loaner. The bank has a fiduciary to the shareholders for a return on the stock price, not individual loan performance. If a bank makes a bet that a bundle of loans that are 75% of the borrowers income stream with a 10% default rate is a better return to the shareholder thru higher rates than a bundle that is 45% of the borrowers income stream with a 1% default rate at lower rates then the bank is not fulfilling its fiduciary responsibility by going for the lower return.

  15. PeteyNice says:

    @JohnMc: If a large percentage of a bank’s mortgage business is the risky 75% of income loans then it certainly reflects the stock price when they turn south. Which they have a much greater chance of doing than the 45% of income loans. While a bank has to consider the maximum profits they also have to balance that against long term stability. I would argue that taking too much risk is not fulfilling a bank’s responsibilities to its stockholders. The key is obviously to balance the risk and that obviously did not happen here. It is so cute how conservatives always cry “personal responsibility!” but let corporations get away with anything.

  16. So, the next time a politician comes along and suggests easement of regulations as a cure-all for everything that irks your economy, remember, there is no such thing as a perfect market and most of the attempts towards liberalized markets are based on informational asymmetries that serve to unbalance them.

    I’m not pushing for anything like controlled markets, but the ideal government intervention should address the inequities that arise in market powers. The fact that most of the regulation we’ve had to this point doesn’t meet that standard doesn’t mean that future regulations won’t. It simply means you’ve elected (economic) idiots in the past.

  17. Majwell says:

    I am going to interject on a bit of a side tangent from where the other comments are going. I think we can argue all day about this market because ultimately it is unregulated and no on has any clue what is going on, even the traders because they only trade a basket of these securities. What I think people should focus on is the impact to investors. Many mutual funds hold these CDS securities, as well as other unregulated securities such as Interest Rate Swaps, Equity Swaps, etc. Though it generally varies from fund company to fund company as to how much of these securities a fund can hold (it also must be discussed in the prospectus) some hold many of these securities and investors should be wary. This shouldn’t mean you should sell funds that hold these CDS’s, but you should determine what types they hold and if you feel it is generating too much risk for you.

    These securities can be valuable to a portfolio, and I assure you some managers use them well, but like always the investor should be aware of what they are investing in.

    To help those who don’t know where to find this information, there is really only two places, Morningstar now tracks derivatives in portfolios, but the website provides you with top 25 holdings, which may or may not be enough to see if there are any major CDS holdings depending on the size of the fund. The other way to find out about these holdings is to check the annual report (N-CSR), semi-annual report (N-CSRS) or the Quarterly portfolio holdings (N-Q) on the SEC website. Derivatives are listed separately at the bottom of the statement of holdings. You can put the ticker in here and look for these filing types:

    [www.sec.gov]

    I would say don’t try to understand CDS’s, because that is nearly impossible, try to understand your personal exposure to these securities.

  18. Snarkysnake says:

    @JohnMc:

    The reality is these CDS’s allow banks to sidestep reserve requirements and become super leveraged in a way that regulators would never allow…If they could quantify and understand what is happening. Banks are already leveraged 10 to 1 (they can lend out $10 for every dollar of deposits),but this takes them into uncharted waters because we haven’t had the “perfect storm” that will test the models these things are based on.
    Now. About regulation. Who’s gonna do it ? These things are not really securities , not really investments and are not known for simplicity or transparency.They are a product of the digital age : Lots of the counterparties are overseas-outside the reach of the U.S. government. How do the folks that want to “regulate” this market plan to do that ? (Not being snarky here- I would really like to know).

  19. Quintus says:

    I think one thing that people are totally missing is the fact that right after 9/11 the economy was in a total shammbles. The economy is run on debt, and the only solution to keep the “illiuson” of a healthy market, which it never was, was to encourage borrowing, on anything from cars to houses. That is why the government (the Bush administration) encouraged these things. And now its starting to nip them in the bud. But it was always a problem, there was never a “healthy” market after 9/11. And if borrowing and spending does not continue the economy will start to really show the sick condition it’s in.

    You think that it’s bad now? This ain’t nothing. The government wants to send you tax credits to get you to spend money so you can keep the stock market propped up. The stock market helps the rich, not the poor. So as the interest rates continue to be lowered, the US dollar is inflatted, hurting, not the rich, and those on DOW street, but the poor and the retired. The avergae Joe.

    Eventually though, it will burst so bad, after all those band aids are no longer able to hold the bleeding in, and everyone, even the rich are going to be smarting.

  20. bohemian says:

    Lack of oversight in anything creates an opportunity for some immoral greedy slimeball to find a way to screw someone else and grab the cash.

    This goes for these obscure securities markets, lending industry, mortgage brokers, realtors, drug companies, insurance companies, manufacturers, retailers and consumers to a certain extent.

    It is the only constant left.

    Free market simply creates criminal enterprise. The real question is how much and what kind of oversight is needed in an industry.

  21. fredmertz says:

    CDS and CDOs are completely unrelated.

    A credit default swap (CDS) is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity.

    In financial markets, collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product. CDOs are constructed from a portfolio of fixed-income assets.

    (thank you wikipedia).

    The problem with CDOs is that they are bundles of crappy loans. The problem with CDS is that there is no regulated market for them — it is the Wild Wild West and there is no central resource for price quotes (quite like high yield bonds).

    I’ve spent the better part of the last ten years in the financial services industry and I’ve learned one true lesson: the financial press are mostly ill-informed and lazy. Their priority is meeting deadlines, not being accurate.

  22. JoeWoah says:

    … this is some Fox News Business Channel logic coming from some of the conservatives. Learn history, gets the facts straight from unbiased sources and go to Grad school for Econ; then feel free to wax eloquently on CDS. There are a few good points, but the sum of the bad far outweighs them all.

  23. @JoeWoah: Srsly. Whatevs, all the conservatives that are so in love with their private retirement investments and jim crameresque stock accounts can go cry a river when they tank.

  24. Canoehead says:

    Here’s the thing about government regulation – there is always someone smarter in the private sector who will figure out how to game the system. I have worked in a couple of different areas in the legal/financial sector where our products were based solely on exploiting obscure, complex and little understood rules and regulations. These were in highly regulated areas, so everyone assumed it was safe, but nothing could be further from the truth. Anyway, at least when it comes to CDSs, folks know that this is the wild west – and should act accordingly. I admit that I tend to be philiosophically free market, but I care more about practical effects, and it has been my experience that government regulation in highly complex areas are almost certain to fail, but before they do they will cause a false sense of security which will only exacerbate the inevitable crash. That said, increasing disclosure requirements for all kinds of holdings probably would not hurt.

  25. Mr. Gunn says:

    I’ve been saying for over a year that the whole thing was a bubble and though it’s certainly the fault of the borrower, it’s going to negatively affect the lender too. The lenders got greedy, made loans they shouldn’t have, and really can’t blame anyone but themselves. After all, unlike a unsophisticated ARM-having consumer, they were supposed to be sophisticated enough to know what was going on. Yes, the models told them they had to leverage themselves like they did, but it’s their fault for putting so much faith in the models being accurate. Better stewardship of their consumer base, in the face of demands for unsafe larger returns, would have prevented this. I don’t buy the argument that they had to invest as they did. A really free market would have, and in the case of Goldman did, bet against CDOs with fantastic success.

    So let’s not talk about a “free” market unless we define exactly what we mean. Slavish adherence to poorly-understood models in the name of fiduciary duty isn’t a free market, it’s an excuse for a big-time screw up that a little common sense and responsibility would have avoided.

    Shareholders will ALWAYS be binded by greed. That’s a given. It’s the duty of the banks to manage their money responsibly anyways, and if the shareholders have too much power to force stupid decisions on the banks, then you’d think the banks would be the first to call for tighter regulations because protecting people from themselves is actually in the banks interest after all. Imagine that.

  26. goller321 says:

    @JohnMc: “But home buyers got greedy and reached for more than they could afford.”….

    Again, an over simplification wielded by a republican…
    While I agree that homeowners share some of the blame, there was PLENTY of illegal activities going on that the banks, realtors and such were either party to or were completely guilty of.
    Let’s not also forget that not everyone is business savvy. And god forbid you dangle a carrot in front of a rabbit and the they go for it. People were sold on the idea that homes would appreciate forever and to keep spending- especially by our unethical leader in the white house. Yes, people were stupid, but they had plenty of help in making those poor decisions…

  27. Trai_Dep says:

    @goller321: And, people ALWAYS ask banks for more than they can justify. Have since Roman times. It’s the bank’s JOB to winnow through the loans, applying rational judgement. And Wall Street’s JOB to only offer securities that work. And the government’s job to make sure they do. Borrowers do what they always have, deserve a sliver of the blame, but the bulk of the blame rests on the shoulders of the companies and regulators (and the GOP for failing their job while “rescuing” Terry Schiavo and “saving” marriage). Without even getting into the scammers, who were legion.

    Sitting on their hands while an obscure financial market grows from $1T to $50T in five years without clamping down to insure that, y’know, parties are at least identified (?!) isn’t asking a whole lot.

    It speaks volumes, though. Conservatives always yammer for a pure, unregulated market. So they got one. Witness the results: carnage.

    The defense rests.

  28. rhombopteryx says:

    @Canoehead:
    The argument that some people will always find a way to game sensible checks and protections is a pretty crappy argument against installing those sensible checks and protections.
    Sure, you’re wise to point out that we should ask “will this fix really help more than hurt?” But don’t dismiss a fix just because someone may outwit it.

    Hollywood has made multiple movies about people who murder and get away with it. I’m pretty sure no-one thinks we should drop restrictions on murder.

  29. Trai_Dep says:

    Yeah, burglers will get into a house if they really want, so we should unlock our doors and leave our valuables near the front door…

  30. rhombopteryx says:

    @JohnMc:

    The underlying bond management is probably technically insolvent…

    Riiiiiight. It’s a fairly big leap from “dabbled in subprime” to “insolvent.” Very few municipal entities are (or become) insolvent, a rate certainly nowhere near the default levels of home mortgages. Sure, your county issues bonds, and sure, they also invest for their employees pension pool (with poor returns, maybe even), but that’s a pretty thin connection. Unless your county is Orange County circa 1994 with no investment/leverage restrictions, its investment losses should have no relation to its ongoing solvency.

    You dilute your (valid) point about the utter dry-up in auction liquidity and the dramatic kicker rates many munis accepted by waving the “insolvent due to mortgage security losses” flag. Munis being drug into technical default will happen due to a liquidity crunch on their bond issuance a lot faster than it’ll happen due to mortgage security losses in the munis’ cash management or insurance pools. Municipalities default when they can’t get cash, not when they lose some of what they already have.

  31. latemodel says:

    Jefferson County, Alabama is well on its way to default as interest rates on bonds has gone from 3% to 10% in the past month, requiring an extra $7 million per month to cover interest and that is before all of the counties 4.6 billion in bonds is adjusted.

    [www.al.com]

  32. rhombopteryx says:

    @DoctorMD:

    Yeah, totally “regulation’s” fault…. Did you notice that every problem you cited was not an instance of “regulation,” but rather private sector choices unencumbered by laws (or meaningful enforcement)?

    It was regulation that got us into this mess of overpriced houses: Artificially low interest rates, gimmick mortgage terms, deductible interest, and forced loans to poor minorities.

    -So the “Artificially low interest rates” – set by none other than private lenders… Seriously! Check the contract. I’m pretty sure the two parties who agree to a particular rate are the home buyer and the home lender, neither of which are government “regulators.”

    -Ditto “gimmick mortgage terms.” Invented and used by private lenders. I can state with total certainty that there is no law saying “banks must use reverse amortizing loans.” Banks chose it themselves. For real.

    -“Deductible interest” is definitely govt.-related, but hardly new, and hardly “regulation.” The realtor and homebuilder lobby have used all their lobby clout to keep this deduction since its birth in the 1890s. They’ve tried to keep “regulation” away fron this cash-cow deduction, even when proposed by some of the more fiscally responsible parts of the current administration.

    -Aside from the overt racism demonstrated, the data contradicts the idea that there are “forced loans to minorities.” Minority rejection rates are consistently higher, and loans actually granted are consistently more expensive, for a minority than for anotherwise economically identical non-minority. As if ‘flat out wrong’ wasn’t enough reality, there’s the additional reality that minority lending is not “mandated” by any law or regulation, but rather clearly prohibited. A lender flat out can’t take race in to consideration when lending.

    The present failure of primary and secondary mortgage markets is a psoter child for enforcing sensible regulations on lenders, borrowers, servicers, and securitizers, and an illustration of the problems that happen when you don’t.

  33. Aphex242 says:

    @JohnMc: Yeah I know I’m late back to the party but I’d love to jump in.

    First of all, I’m not a pontificating liberal. I happen to be a moderate. Yes, I know, I’m an endangered species.

    Second – I’m fully aware this has nothing to do with the mortgage industry, I was replying to a knee-jerk radical who believes that deregulating everything is good for the economy. The mortgage industry is a specific and current example of the failure of that philosophy.

    Third – When minorities are shoveled into subprime loans that do not reflect their credit worthiness (as it is increasingly alleged that Countrywide, America’s largest lender has done), you can blame the minorities all you want, but I’d instead blame the apparently racist and illegal lending policies of the bank that is federally regulated, and bound by the same Constitution that everyone else is.

    Lastly – If the banking industry is needing a bailout because they couldn’t accurately judge the creditworthiness of their customers, and/or falsified that information to clear their underwriters, I would say that is PRECISELY the banking industry’s fault. If you give a mortgage to someone where the monthly payments are 75% of their monthly income, you’re as big a dope as the consumer taking the loan.

  34. Ass_Cobra says:

    @JohnMc:

    This explanation is nice and full of sloppy jargon but totally devoid of basis in fact or insight into the actual problem. “Technical federal default”? Ummm…does not exist. You can be technically insolvent is that maybe what you are thinking about?

    “The latest disaster that is about to unfold is in the muni bond market. The underlying bond management is probably technically insolvent because they too dabbled in the subprime securitization market.”

    There’s the right word, technically insolvent, but I can’t tell in what context you are using it. The underlying bond management is technically insolvent? Do you mean the manager of the bonds may be insolvent because some of their portfolio is in subprime? What exactly does that have to do with the solvency of the issuers of muni debt? Are you talking about Monoline insurers?

    ” Kicker here is under the nature of muni market the long term bonds are treated like short term instruments. “

    You are refering to auction rate notes. There is nothing “under the nature of muni-market” that treats long term bonds like short term instruments. Auction rate notes make up maybe $250bn of the $2TN or so of state and local government issuance. The issue with ARNs failing recently is more of an issue with short term uncertainty in the market versus long term veiws on the insolvency of issuers. A much better treatment of this than I can hope to present here can be found at accruedint.blogspot.com.

    “One can bid on the bonds in the given interval. So one could bid on Port Authority of NJ bonds Chinese auction style.”

    Do you even know what a Chinese auction is? I’ve never seen security offered using that framework. I know I’d get shot if I bid on a bunch of raffle tickets to have a chance to win a security.

    “no bidder then the rate automatically goes up to the agreed rate that can be 12-20% depending on what was signed for.
    So imagine, your school board floated one of these bonds (quite common actually) and nobody bids as bidders are afraid of the underlying risk. The bond has a 20% kicker rate. If the district had been paying 5% their budget just got whacked by a 4x increase. How do they cover it? In some cases they may not be able to. In other cases schools would have to eliminate programs, schools and teachers”

    Again you fail tor grasp how this works. The fail rate is payable for about a week until the rate resets again. They are also all callable so worst case the municipality pays the fail rate for a few weeks and refinances into fixed rate or VRDNs.

    “By the way Warren Buffet has an offer on the table to cover much of these issuers for a deep percentage of the original holding.”

    What in the world do you mean by a deep percentage? Do you mean a large percentage of muni issuers? If so his offer is actually a large percentage indeed. He’s offered to take 100% of AMBAC, MBIA and FGICs muni book for the munificent price of 150% of unearned premium. What a guy.

  35. Ass_Cobra says:

    @fredmertz:

    “CDS and CDOs are completely unrelated”

    This is why I don’t use Wikipedia as a primary source. CDOs and CDS are actually quite strongly related. Synthetic CDOs (which are CDOs backed by credit default swaps) are huge counterparties for CDS exposures. Basicall the bank will arrange to sell protection to one party and then buy protection from the CDO on the other end. Alternatively a synthetic CDO manager would axe certain credits and then ask a bank to source it for them. There’s still a large amount of inter-dealer CDS but CDOs that are CDS counterparties are not an insubstantial part of the market.

    “it is the Wild Wild West and there is no central resource for price quotes (quite like high yield bonds).”

    There’s actually a huge amount of price discovery that happens on both CDS and high yield debt. The easiest example of this is Markit partners. They price like 3,000 reference obligations intraday. Plus inter-dealer I can’t tell you how many bid lists I see per day. Since this is an OTC (inter-dealer) market, there’s no reason to have a central exchange. It’s no less efficient than the corporate debt markets, investment grade or high yield.

  36. ninjatales says:

    @JohnMc: By the way, it was Congress that back around 1999-2000 encouraged banks to loosen their loan requirements. Rangel (D) was a big proponent of this and had the clout to make it happen being on the Ways and Means, and Taxation committees. Democrat in a Democratic Congress.

    I take it that you don’t follow much politics yet you like to dabble in it and whine around about the “liberal” demons who are tearing apart your closed mind.

    Everything you pointed out there was wrong or twisted in a childish manner other than “Rangel” and just so you know, Rangel ain’t exactly a “liberal” Democrat unless you paint anybody who openly criticizes Bush as one. Cuz then, there’d be a lot of Democrats and you sure aren’t going to be happy.

  37. Ass_Cobra says:

    JohnMC is fond of misinformation Ninjatales. Rangel was actually the Ranking Democrat on the House Ways and Means Committee. Bill Archer (R-Texas) was the Chairman. Why was he the Chairman, because there was a Republican majority in the House and Senate in the 106th Congress (1999-2000). Here’s the link for those that like cites over assertions.

    [www.opensecrets.org]