The other Shoes

Q: What market has $45 trillion, is nearly totally illiquid, has no mark to market prices because there is no market, and are held by virtually every bank and brokerage firm in the world?

A: Another MBA genius "investment" vehicle called a Credit Default Swap. This is something that supposedly insures a bond holder against the risk of default by corporate and other bonds. What are they worth? Nobody knows. Why is this bad? Because there isn't enough money in the world to cover losses in this market (which doesn't exist). Is AIG involved? Don't know but this market is about to unravel too. Per Wall Street Journal:

"As with other securities that trade privately and by appointment, assigning values to credit default swaps is highly subjective. So some on Wall Street wonder how much of the paper gains generated in these instruments by firms and hedge funds last year will turn out to be illusory when they try to cash them in."
We may be about to find out. My prediction: Socialism. This stuff is clearly criminal


Chris J said...

Yes, the derivatives catastrophe. I remember hearing that when Warren Buffett bought GenRe (formerly the General Reinsurance Corporation) about ten years ago, it came with a book of derivatives that supposedly was worth around $300 million. Buffett didn't like the idea of derivatives, so he told his minions to unload it all. What they found out was that nobody wanted to buy them because nobody could figure out what the things were worth. Afterwards Buffett began calling derivatives "weapons of mass destruction".

Since Buffett and his people can't understand derivatives, I don't feel so bad about not understanding them. Here's the best short essay I've found about the derivatives fuckup:

AIG’s Dangerous Collapse
& A Credit Derivatives Risk Primer

You should check it if you haven't already. The first part, about the sales operations of derivatives desks, is straight out of your favorite movie Boiler Room -- but of course with a hell of a lot more money.

Now if that wasn't enough to make you sick this guy, after explaining derivatives as a way to get around banking regulations, says that AIG's biggest customer for credit default swaps was ... Goldman Sachs.

Howard said...

Great links. I posted them atop the blog today.