More on the subprime mess — credit default swaps

I’m certainly no expert on this topic, and don’t claim to understand it. I have written previously of my attempts to understand the subprime mess.

Here is a great post on metafilter by Mutant about credit default swaps which I came across today.

~ by scaryreasoner on October 10, 2008.

9 Responses to “More on the subprime mess — credit default swaps”


    Maybe this will make sub-prime and what is following easier to understand, and it’s quite funny too.

  2. Well, it was somewhat funny, but didn’t explain anything I didn’t already know, and failing to mention credit default swaps, or the credit market at all means that they completely, totally, 100% missed the main problem.

    Even *I* know that, and I don’t know shit.

    Basically, it’s somewhat funny, but not really that informative. 30 minutes spent googling would teach one more.

  3. Well I just watched the McLaughin Group talking about this on TV, and they are all more clueless than I am as well. Ant that’s scary because I’ve only spent four or five hours learning about all this stuff on the internet. Despite this, it was EXTREMELY CLEAR that I knew more than all the panelists. Especially more than the stupid black lady who tried to say that the problem was due to *excessive* regulation, basically blaming (though she didn’t say so explicitly, probably because should didn’t know) the Community Restoration Act, and specifically some Clinton changes to the policies which that bill had permitted. That is, some stuff to do with encouraging lending to minority groups. However, *nobody* in this group mentioned securitization of loans, that is packaging them up into bundles sold to SIV’s (special interest vehicles). These SIV’s would then own the loans, and sell stock — thus a) removing the risk of the loan from the lender, and b) converting the loan into a security (think, “stock”). Nobody mentioned that, and that is a _fundamental_ aspect of this crisis.

    Then there’s the credit market. On NPR this morning, they spent some time interviewing some guys that work in a place that brokers loans between banks. Big loans. Typically, there will be billions of dollars of loans crossing these guys desks on any given day. They had a board in their office. On one side of the board was banks wanting loans, on the other side, banks offering loans. They had 45 banks on the ‘wanting loans’ side, and *zero* banks on the ‘offering loans’ side. They had no business at all that day. Nor for the past three weeks. No credit movement at all for three weeks, when normally billions of dollars would be borrowed and lent. That’s how frozen things are.

    Then there’s the credit default swap mess, which amplifies the risk inherent in the whole subprime mess. (Read the metafilter link, and the stuff that links to, I can’t explain it here adequately.)

    The point is, these McLaughlin group people on both sides of the aisle don’t get it. They never mentioned credit default swaps. They never mentioned the frozen credit market. They’re fixated on these bad subprime loans. But they are fixating on only the most obvious proximal cause, and ignoring 90 percent of th actual mess. The do not get it. They have no idea. No idea. It’s really frightening how little idea they have.

  4. Hi scaryreasoner,

    I don’t see credit default swaps as being a big problem – yet.

    That is why it always comes back to housing, and the governements continued desire to put more and more money in to the banks.

    If nobody else defualts, everything is fine.

    As you can see I am a noob at CDS too – but as I understand it, nobody knows how many CDS are out there, what the trigger is and what the value is. I have the impression this is much like the initial days of the sub-prime, nobody saying what their real exposure is.

    On the commentary of others – I am amazed that most people understand nothing about at all about how our financial system works, particularly politicians. You would think it would be a pre-requisite to holding any kind of office.

    Lending: As I understand it most banks fall into one of a couple of groups. They have money to lend, but don’t trust that the bank they will lend it to will be open tomorrow in order to repay it, or secondly the bank so close to the liquidity ratio against a background of falling asset values that they simply cannot loan any money at all.

    Now I think alot of people go back to sub-prime because they don’t really understand anything other than what the guy on fox just told him, and also, because if you could find a way to A rate all those bad mortgages you could carry on as if nothing had happened. Sadly I think the chance of that has passed,

  5. I saw George Soros talking with Bill Moyers last night on PBS last night. They also didn’t really get into the credit default swaps mess, but I think — but am not sure — that George Soros gets it in that he is calling for recapitalizing the banks, that is, injecting money so they can begin lending again. The only thing that makes me worry that maybe he doesn’t get it is that part of the reason banks aren’t lending to each other is that they do not know how exposed other banks are to risk via these credit default swaps — nobody does. So they’re all sort of paralyzed by fear. Injecting capital might help, but then again, they might just sit there hoarding it all because they are unable to asses the risk of thosw who want loans in the credit market — that is, other banks.

  6. Oh, shit, here’s the link to the metafilter thread on the George Soros/Bill Moyers talk:

    Metafilter thread about George Soros/Bill Moyers talk about the economic crisis

    Here’s a link to the video of George Soros and Bill Moyers talking about the economic crisis, Oct 10, 2008.

  7. Thanks for the comments omgdidisaythat. Sorry if I came across as a dick in my response — I’m kind of pissed at the media for failing to even try to do their job, for the most part on this story. They refuse to try to explain anything except in the most extremely dumbed down way for the most part, and it kind of pisses me off, and I think a little of that anger came across in my response to you, which was not really cool.

    The Bill Moyers thing made me feel a little better though.

  8. No need to apologise scaryreasoner, I understand completely, these times are scary, complicated, frightening times, and almost nobody seems to have any idea whats going on at all, if they do they are not part of the government. I understand your anger, I feel the same way.

    The George Soros interview was interesting. I think you are right in your analysis of his suggestions too. I think there is no way to save this system really, just to delay the inevitable.

    I am not normally one given to consiracy theories, but I found this interview with Naomi Wolf very interesting, she has a different view on the financial crisis, although she only mentions it in passing as part of a wider topic and does not mention credit swaps at all. If you have enough time please have a look.

  9. scaryreasoner – I didn’t think you came across that way at all. And we have every right to be pissed at the media. Why they are not on top of this I do no know. If you or anyone else is looking for indepth expertise and comments on these issues, I have found Mutant (whom you mentioned briefly) very insightful in his postings and even agreeable to answer all of my questions, recommend books and talk away my anxiety – he is a real great guy. Also he has a “profile page” on Metafilter that has lots of information

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