The $50 Trillion Swindle the Investment Class Doesn’t Have Us on the Hook For - Yet

October 6, 2008 by Pelikan
Filed under: Bailout Bill, U.S. Congress, U.S. Economy, U.S. Financial Crisis 

Credit Default Swaps and the Potential Cost of a Las Vegas Financial System

If you’ve been paying any attention to my posts and choice of content over the last two weeks, you know I’m not for the current $700 billion federal bailout of Wall Street which is underway thanks to the jackasses in Washington – and I’m talking all of them regardless of party.

Granted, I’m not a financial expert. But, I have tried to educate myself, and this bailout just seems to be rewarding bad behavior with worse public policy. One book I’m about done with is Kevin Phillips’ Bad Money. This book is currently ranked 63 on Amazon and I highly recommend it. At any rate, just when I was getting resigned to the fact the bailout is now a fact of life, and there’s nothing I can do about it, I got a little more education this weekend.

On Sunday morning, I heard the latest edition of This American Life. Part of the show dealt with the impending doom that is ‘credit default swaps.’ You should give this show a listen online. Ira Glass’s gang simply defines and exposes the scope of the risk out there with these ’swaps.’ Later in the day came this report by 60 Minutes. This is another great piece of journalism exposing the problem with these financial vehicles. So, what are they – and why should we care?

Let’s say I’m a hedge fund and I have $1 billion wrapped up in a collateralized debt obligation (CDO) – aka a bunch of mortgages bundled together, many of which are shit. Lehman Brothers or CitiGroup comes to me and says, “We will insure you against loss for 2% of what you paid for the CDO.” I’m a little worried about the underlying assets in the CDO, so I say, sure, and fork over $20 million. CitiGroup has now made $20 million for nothing. When banks, investment banks, and hedge funds were doing these deals, they were merely placing a bet that the CDOs they were “insuring” wouldn’t tank.

We know what’s been happening. There’s more junk in the CDOs than anyone realized or cared to admit. I believe part of the reason Lehman failed is that the folks they sold credit default swaps to began to come calling for their insurance payout. But wait, I’m talking about insurance, right? Why are they called ’swaps?’ Simply put, if they called it insurance, it would be regulated, ie. the Lehmans of the world would have to show capital, or a risk reserve fund, backing up their deals. That’s cash. They call them swaps so the whole transaction remains the unregulated, gambling pile of poo that it is.

So far, taxpayers, we’re on the hook for $700 billion. If you watch the 60 Minutes segment, you’ll find out that the estimated value of all the credit default swaps out there in the world’s markets is around $50 trillion. That’s a “T” and an “R” at the beginning of that “illion.” How many more of the “insured” are going to demand payment from the underwriters of these swaps? How many more banks, insurance companies, or investment houses are going under? Who is going to pay for that?

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2 Comments on The $50 Trillion Swindle the Investment Class Doesn’t Have Us on the Hook For - Yet

  1. The U.S. Government Lie: $700 Billion Bailout : Clips & Comment on Thu, 16th Oct 2008 8:47 pm

    2. [...] don’t know is exactly how many bad assets are out there. We know what mortgages are bad – we don’t know how many other market gambles such as credit default swaps were placed on those [...]

  2. Treasury Bailing Out AIG Again : Clips & Comment on Mon, 10th Nov 2008 8:25 am

    3. [...] AIG is also thought to be ass over teakettle involved in the toxic credit default swap market, a potentially $50 trillion bubble lurking out there from New York to Hong [...]

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