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Strategies & Market Trends : The coming US dollar crisis -- Ignore unavailable to you. Want to Upgrade?

To: ggersh who wrote (44880)	3/28/2012 1:26:13 PM
From: Pogeu Mahone	Read Replies (1) \| Respond to of 71447

Who would trust these guys as far as you could throw them and they keep buying CDS. lol ----------------- Credit Default Swaps Updated: March 9, 2012 Credit default swaps are financial instruments that serve to protect against a default by a particular bond or security. They were invented by Wall Street in the late 1990s as a form of insurance. Between 2000 and 2008, the market for such swaps ballooned from $900 billion to more than $30 trillion. In sharp contrast to traditional insurance, swaps are totally unregulated. They played a pivotal role in the global financial meltdown in late 2008. The Dodd-Frank financial regulatory reform bill passed in 2010 called for the creation of new clearinghouses for derivatives, a class of financial transaction that includes credit default swaps. Swaps also became the subject of antitrust investigations in both the United States and the European Union.The investigations focused on whether the handful of big banks that dominate the swaps field have harmed rival organizations that could compete in markets for providing information and clearing swaps deals. And swaps became a crucial element in the complex negotiations over what amounted to a large-scale writedown by Greece of its government debt in early 2012. As part of Greece’s restructuring, officially described as voluntary, but backed by a new Greek law, bondholders were required to take a 75 percent loss on their holdings. A number of economists worried that the a ruling that the writedown did not trigger a “credit event’' would hurt the CDS market, because if borrowers can structure defaults to circumvent swaps payouts, investors may come to see the swaps as unreliable. In the event, the swaps were triggered only on relatively small pool of bonds with a small net payout. Nearly $70 billion of swaps were outstanding on Greek debt. But the net number was $3.2 billion, which is arrived at by subtracting swaps that pay out on a default from those that get paid. The original purpose of swaps was to make it easier for banks to issue complex debt securities by reducing the risk to purchasers. It is similiar to the way the insurance a movie producer takes out on a wayward star makes it easier to raise money for the star’s next picture. Here is a more detailed but still simplified explanation of how they work, given by Michael Lewitt, a Florida money manager, in a New York Times Op-Ed piece on Sept. 16, 2008: “Credit default swaps are a type of credit insurance contract in which one party pays another party to protect it from the risk of default on a particular debt instrument. If that debt instrument (a bond, a bank loan, a mortgage) defaults, the insurer compensates the insured for his loss. The insurer (which could be a bank, an investment bank or a hedge fund) is required to post collateral to support its payment obligation, but in the insane credit environment that preceded the credit crisis, this collateral deposit was generally too small. As a result, the credit default market is best described as an insurance market where many of the individual trades are undercapitalized.” Read More...