Trump must enact rules on banks so that a financial crisis never happens again. NEVER AGAIN, FOLKS!

[Andylusion]

I would like to see an insurable interest requirement for all credit default swaps. It is amazing to me such a regulation does not exist to this day. The lack of this requirement played a big part in the last crash.

That still turns my head round & round.....to my understanding (limited) the entire scenario orbits profiting on an impending failure.....

this big, dynamic, complicated economy of ours needs basic regulations in place, my friends, to make sure markets work.

We had 'em, they broke 'em......now i don't profess intricate knowlege beyond what i read.....but it would appear the punsihment (if any) justifies the crime.....

Bloomberg - Are you a robot?

~S~

This is a strange line of thought to me.

"insurable interest requirement for all credit default swaps"

Huh? Credit default swaps ARE the insurance.

There is nothing super complicated about it. It is actually one of the most easy to understand concepts in the world.

I am a lender. I am lending to a large corporation. The debt is large enough, that I worry about if the company defaults.

I want insurance on this debt, that just in case there is an off chance the company defaults, that my company will be able to survive the loss.

So I take out a credit-default swap. I pay this bank a quarterly payment, and in return I have a payout if the company defaults on their debt.

This would be the same as car insurance. I pay a monthly premium, and in return if there is an accident, the company gives a payout for what is covered.

A credit default swap, is nothing complicated or mystical. It is simply insurance for a default.

There was no crime here. Without credit default swaps, the crash would have be far worse. A ton more institutions would have been in financial difficulty, if not for the mitigating effect of Credit Default Swaps.

You are terribly, horribly, seriously wrong.

Insurance requires an insurable interest. CDS do not.

When you say "There was no crime here", you are also being terribly misguided. CDS is like burning down your neighbor's house and saying "There is no crime here" because there are no laws against arson. While technically correct, it is a truly fuckwit thing to say.

Now pay attention.

If you borrow $200,000 to buy a house and it burns down, you still have to pay back that $200,000. And you have no house.

That totally sucks.

So you buy insurance. In fact, for a government backed loan, you are required to buy insurance.

Cool. All is good.

But what about the other end of this deal? You loan $200,000 to someone and then they default. They don't pay you back. FUCK! You're out 200 grand!

And that is what the CDS was invented for. It was insurance a lender could buy to cover the risk of default.

But here is where our politicians really screwed the pooch, ladies and gentlemen.

The inventors, sellers, and buyers of CDS did not want a CDS to be called "insurance". In federal law, there are all kinds of rules surrounding any insurance product. And the free wheeling marketeers HATE regulations. They dodge and evade them as much as possible.

So let's not call a CDS insurance any more, mm-kay? SHHHH! (*wink wink*)

We will call a CDS a...ummm...hmmm...aha! We will call it a "derivative"! Yeah, that's it.

Now why didn't anybody want to call a CDS what it is? Why didn't they want to call it insurance?

Because insurance has this annoying thing called an "insurable interest" requirement.

This simple regulation prevents homicides, arsons, and all kinds of other nasty things. Man, I hate regulation!


If you own a house, you buy fire insurance against that house because you stand to lose money if it burns down.

If the house of someone across town burns down, you don't suffer a financial loss. This means you do not have an "insurable interest" in that stranger's house.

You cannot buy fire insurance against a stranger's house because of the insurable interest requirement.

The reason you cannot buy insurance against a stranger's house is pretty obvious. There would be a shitload of arsons. A guy could buy insurance against a stranger's house, make a single premium payment, and then torch that stranger's house to the ground and collect the insurance.

If there wasn't an insurable interest requirement for life insurance, we could all insure that black guy down the street and then lynch the shit out of him and make some profit at the same time! U-S-A! U-S-A! U-S-A!

So not all regulations are bad, eh? Some save lives and money.

But imagine if you could buy fire insurance against a stranger's house. Imagine if everyone could.

A $200,000 house could have ten policies against it by strangers. Now if the house burns down, the insurance company isn't out $200,000. It is out $2 million!!!

And that is the problem with CDS. They do not have an insurable interest requirement. They are totally unregulated.

That is why all the players went out of their way to get the regulators not to call a CDS "insurance".

But why would they do that? Isn't that fucking CRAZY!?!

Yep.

But we are talking about people who have moral qualms about lynching for profit, so to speak.

With a CDS, a person could bet against your mortgage burning down. Not kidding.

Now think about that.

If you are an arsonist, what's a sure way to guarantee a bunch of mortgages are going to burn to the ground?

You lend money to people you know can't possibly make the payments. Then you build a CDO out of those mortgages. Then you build a synthetic CDO on top of that toxic CDO.

But since there isn't even an insurable interest requirement for CDS, you can go out and find toxic mortgages which you didn't even make, and pack them into your synthetic CDO!

Then you sell the tranches for that synthetic CDO to some mushroom investors who you don't tell you built this whole firetrap. They have no idea you are on the other side of the bet, because you used a broker-dealer at Goldman Sachs as your cutout.

Then you throw the match and collect the insurance.

And that, ladies and gentlemen, is exactly what ABACUS 2007 AC-1 was all about.

FMI: Factbox: How Goldman's ABACUS deal worked | Reuters

Insurance requires an insurable interest. CDS do not.

True. Yet the primary person likely to get a CDS, was the lending party.

Obviously if you had to have an asset, then it would be literally insurance, and they wouldn't call them a CDS. But nevertheless, that is effectively what a CDS is. It is an insurance policy against default.

CDS is like burning down your neighbor's house and saying "There is no crime here" because there are no laws against arson.

Ridiculous. Taking out a CDS, does not cause someone to burn down your house. There is not a single example of what you claim. There are plenty to the contrary.

For example, companies still to this day routinely take out life insurance policies on their employees. I don't know of a wide spread corporate assassin squads wiping out employees to get insurance money.

Then you sell the tranches for that synthetic CDO to some mushroom investors who you don't tell you built this whole firetrap. They have no idea you are on the other side of the bet, because you used a broker-dealer at Goldman Sachs as your cutout.

You are mixing multiple things that are not connected. Goldman Sachs did not make the mortgages. Goldman Sachs did not sell the CDOs. Goldman Sachs customers made the mortgages, and sold the CDOs.

Now Goldman Sachs believed that based on market information, the CDOs would fail. But the customer did not believe that. Nor did Goldman Sachs cause the CDOs to fail.

The Credit Default Swaps, had absolutely nothing whatsoever, to do with the sub-prime mortgages failing. Goldman Sachs did not cause the customer to lose money. They had nothing to do with it.

If Credit Default Swaps did not exist.... the sub-prime loans would still have defaulted. The Mortgage Backed Securities would still have failed. Indymac, Bear Stearns, and Countrywide would have all still failed.

Not one single aspect of the CDSs, had anything at all to do with the crash of sub-prime loans.

Just like if your next door neighbor burned down your house to collect an insurance payout, you would sue him, and have the police prosecute him.... if Goldman Sachs had somehow caused Countrywide to fail, they would be sued, and or prosecuted by the SEC.

So such thing happened, because Goldman Sachs was utterly unconnected with the failure of the underlining default.

Goldman Sachs only made a bet that the CDO would default. And it did. Because they were dead on right, that the affordable housing goals of the government would fail... you are mad at them for making money.

It is ridiculous to think that somehow Goldman Sachs caused the people who purchased a mortgage they can't afford, to default on their loan simply because Goldman got a CDS. Nor would they have magically paid their loan, and not defaulted, because Goldman did not get a CDS on the loans.

 

[g5000]

If Credit Default Swaps did not exist.... the sub-prime loans would still have defaulted.

Nope. Not nearly on the scale they did. The CDS allowed the retards to believe they had eliminated risk. And because they believed they had eliminated risk, they made more loans than they should have or would have, all in the name of earning more fees.

The whole time AIG was selling CDS, they were not putting aside any capital in the event of defaults. Again, because everyone believed there was no risk of default.

CDS also allowed people who had no insurable interest to buy CDS against products they didn't own, and that was a force multiplier of the crash. THAT is what brought down the house of cards.

You seem to be willfully oblivious to how CDS were abused due to the lack of an insurable interest requirement.

 

[sparky]

The Credit Default Swaps, had absolutely nothing whatsoever, to do with the sub-prime mortgages failing. Goldman Sachs did not cause the customer to lose money. They had nothing to do with it.

If Credit Default Swaps did not exist.... the sub-prime loans would still have defaulted. The Mortgage Backed Securities would still have failed. Indymac, Bear Stearns, and Countrywide would have all still failed.

Not one single aspect of the CDSs, had anything at all to do with the crash of sub-prime loans.

The 2008 Financial Crisis
By mid-2007, there was more than $45 trillion invested in swaps. That was more than the money invested in the U.S. stocks, mortgages, and U.S. Treasurys combined. The U.S. stock market held $22 trillion. Mortgages were worth $7.1 trillion, and U.S. Treasurys were worth $4.4 trillion. In fact, it was almost as much as the $65 trillion produced by the entire world.


Credit default swaps on Lehman Brothers debt helped cause the 2008 financial crisis. The investment bank owed $600 billion in debt. Of that, $400 billion was "covered" by credit default swaps. That debt was only worth 8.62 cents on the dollar. The companies that sold the swaps were American International Group, Pacific Investment Management Company, and the Citadel hedge fund.


They didn't expect all the debt to come due at once. When Lehman declared bankruptcy, AIG didn't have enough cash on hand to cover swap contracts. The Federal Reserve had to bail it out.


Even worse, banks used swaps to insure complicated financial products. They traded swaps in unregulated markets. The buyers had no relationships to the underlying assets. They didn't understand their risks. When they defaulted, swap sellers like Municipal Bond Insurance Association, Ambac Financial Group Inc., and Swiss Reinsurance Co. were hit hard.


Overnight, the CDS market fell apart. No one bought them because they realized the insurance wasn't able to cover large or widespread defaults. They accumulated capital and made fewer loans. That cut off funding for small businesses and mortgages. These were both large factors that kept unemployment at record levels.

How a Boring Insurance Contract Almost Destroyed the Global Economy

~S~

 

[Andylusion]

If Credit Default Swaps did not exist.... the sub-prime loans would still have defaulted.

Nope. Not nearly on the scale they did. The CDS allowed the retards to believe they had eliminated risk. And because they believed they had eliminated risk, they made more loans than they should have, all in the name of earning more fees.

The whole time AIG was selling CDS, they were not putting aside any capital in the event of defaults. Again, because everyone believed there was no risk of default.

CDS also allowed people who had no insurable interest to buy CDS against products they didn't own, and that was a force multiplier of the crash. THAT is what brought down the house of cards.

I've heard that theory before. There is little to no evidence of it.

CDS did not allow people to believe they eliminated risk. No CDS that I am aware of, covered 100% of the credit-default. Even if you covered 60%, that would be a 40% loss.

There are tons of people who have claimed that CDSs caused additional lending.
Aside from tons of talk about how CDSs created additional lending, I'm not seeing any real evidence of that.

Government backing to sub-prime loans, increased lending.
Lowering mortgage standards by Fannie and Freddie, increased lending.
Suing banks to force them to make sub-prime loans, increased lending.

But thus far, I have not seen real direct evidence that CDSs increased lending.

I would wager Barnie Frank had more of an impact, than Credit Default Swaps.

 

[g5000]

If Credit Default Swaps did not exist.... the sub-prime loans would still have defaulted.

Nope. Not nearly on the scale they did. The CDS allowed the retards to believe they had eliminated risk. And because they believed they had eliminated risk, they made more loans than they should have, all in the name of earning more fees.

The whole time AIG was selling CDS, they were not putting aside any capital in the event of defaults. Again, because everyone believed there was no risk of default.

CDS also allowed people who had no insurable interest to buy CDS against products they didn't own, and that was a force multiplier of the crash. THAT is what brought down the house of cards.

I've heard that theory before. There is little to no evidence of it.

CDS did not allow people to believe they eliminated risk. No CDS that I am aware of, covered 100% of the credit-default. Even if you covered 60%, that would be a 40% loss.

There are tons of people who have claimed that CDSs caused additional lending.
Aside from tons of talk about how CDSs created additional lending, I'm not seeing any real evidence of that.

Government backing to sub-prime loans, increased lending.
Lowering mortgage standards by Fannie and Freddie, increased lending.
Suing banks to force them to make sub-prime loans, increased lending.

But thus far, I have not seen real direct evidence that CDSs increased lending.

I would wager Barnie Frank had more of an impact, than Credit Default Swaps.

Read the link sparky provided in post 63.

The damages caused by CDS are well-documented.

 

[H B Lowrie]

So...specifics, please.

for starters, my friends, we need a modern version of Glass-Steagall to separate plain-vanilla banking like checking accounts and savings accounts from crazy risk-taking on wall street.

in 2016, my friends, Trump campaigned on this idea, and it was added to the republican platform on his insistence.

Why, when we can always bail them out with socialism funded by the unsubstantial people again?

 

[sparky]

I would wager Barnie Frank had more of an impact, than Credit Default Swaps.

That SOB has an entire history associated with banksters ,starting with the Clinton administration, ending with the banking commish.

Cliffs notes> He was a huge advocate of rescinding Glass Steagal w/ Clinton, and then appointed chair of the banking commission whitewashing by Obama after it all blew up

AND, has worked for major fiscal instititions all along

I honestly can not think of a more evil incumbent w/in our political system

~S~

 

[there4eyeM]

Insuring what are essentially just wagers, bets, with tax payers' funds, is the formula for disaster.

 

[sparky]

Insuring what are essentially just wagers, bets, with tax payers' funds, is the formula for disaster.

You mean living for the moment? guttural greed 4eyeM?

~S~