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good question Credit Default Swaps
From: David Farber <dave () farber net>
Date: Wed, 2 Apr 2008 11:16:53 -0700
________________________________________ From: Erik Cecil [erik.cecil () gmail com] Sent: Wednesday, April 02, 2008 1:13 PM To: David Farber Subject: Re: [IP] Credit Default Swaps Dave, I for one, am not terribly sophisticated on these issues. I assume there are others in the same boat. So while I don't know if this is a question for the list, it's possible that others may be wondering how this sort of analysis is no different than adding up the value of all bets placed on the Superbowl and claiming that after the event, millions of dollars (i.e. at least twice the value of the money actually exchanged b/c you're counting both sides of the transaction) were bet & no one really knows how much was "lost" (i.e. some are straight bi-lateral bets, others placed with odds-makers / bookies, some legal transactions, some not, etc.). If that's correct, then isn't it true in an ultimate sense that only some portion of the $45 trillion really matters to the economy? IOW, how can you bet more than twice the amount of money than there exists in the entire U.S. economy? Would it be accurate to look at this as the mother of all ponsi schemes such that lots of individual bottom lines may be affected but the money, in and of itself, didn't go away? Rather, it means that that the last one to receive cash wins? The rest "lose" money, but relative to the entire economy, again, money just moved around? Is there also potential, over the longer term, that individuals and businesses can also use those "losses" to offset taxes? By asking these questions, I'm not taking any position at all; I simply attempting to grasp what it means when someone says $45 trillion is in play, but the U.S. economy = $22 trillion. With every best wish, Erik Cecil On Wed, Apr 2, 2008 at 7:16 AM, David Farber <dave () farber net<mailto:dave () farber net>> wrote: ________________________________________ From: Andrew C Burnette [acb () acb net<mailto:acb () acb net>] Sent: Wednesday, April 02, 2008 9:02 AM To: David Farber Subject: Credit Default Swaps Dave, for IP if you wish. Credit Default Swaps Heard an interesting broadcast on Marketplace (a PRI radio program; April 1, 2008) on the issue of Credit Default Swaps. Interesting aspect is that nearly 45T USD of these are "in play" in the market. According to the discussion, The Bear Sterns buyout may have been a self saving mechanism for JPmorgan, as the risk of Bear Stern's failure becomes a risk of collapse for the holders of these guarantee certificates. Perhaps JP Morgan saw a risk exposure due to their own trades with Bear Sterns. Very interesting financial instrument, intended to spread risk around ("probably the most important instrument in finance," according to former Fed chair Alan Greenspan), however, when many begin to suffer, there's little assurance that any of the other holders of these swaps may be actually able to back up a default. From the program transcript: The value of the entire U.S. Treasuries market: $4.5 trillion. The value of the entire mortgage market: $7 trillion. The size of the U.S. stock market: $22 trillion. OK, you ready? The size of the credit default swap market last year: $45 trillion. http://marketplace.publicradio.org/display/web/2008/04/01/credit_default_swaps_q/ ------------------------------------------- Archives: http://www.listbox.com/member/archive/247/=now RSS Feed: http://www.listbox.com/member/archive/rss/247/ Powered by Listbox: http://www.listbox.com ------------------------------------------- Archives: http://www.listbox.com/member/archive/247/=now RSS Feed: http://www.listbox.com/member/archive/rss/247/ Powered by Listbox: http://www.listbox.com
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