(WashingtonsBlog) – As I have previously shown, speculative derivatives (especially credit default swaps or “CDS”) are a primary cause of the economic crisis. They were largely responsible for bringing down Bear Stearns, AIG (and see this), WaMu and other mammoth corporations.
According to top experts, risky derivatives were not only largely responsible for bringing down the American (and world) economy, but they still pose a substantial systemic risk: Continue reading →
You may remember American International Group (AIG). The U.S. government gave it $182 billion of taxpayer money last fall in exchange for a 78 percent stake. Of that money, $165 million went for bonuses to a handful of people in its Financial Products Group (FPG), which sold Credit Default Swaps (CDSs) on which AIG lacked the capital to make good. And $200 million more is slated for those good folks in 2009. Continue reading →
In a little more than a decade, Credit Default Swaps (CDS) have ballooned into a multi-billion dollar industry which has changed the fundamental character of the financial system and increased systemic risk by many orders of magnitude. Continue reading →
CDS are like an insurance contract, where the purchaser buys “insurance” that a company won’t go out of business from a seller. If the company stays in business, the purchaser pays premiums to the seller, but if the company goes belly up, the seller has to pay the face value of the CDS “policy”.
The Fed’s $12.8 trillion of monetary stimulus has triggered a six week-long surge in the stock market. Think of it as Bernanke’s Bear Market Rally, a torrent of capital gushing from every leaky valve and rusty pipe in the financial system. The Fed’s so-called “lending facilities” are a joke; stocks rocket into the stratosphere while the broader economy is stretched out corpse-like on a cold marble slab. Is this an economic recovery or just more of Bernanke’s “no down” zero-percent “no doc” faux prosperity? Continue reading →
Myron Scholes, the creator of the infamous Black-Scholes model for pricing derivatives which won the Nobel Prize and then almost destroyed the world banking system with the Long Term Capital Management bankruptcy of 1998, has now partially understood that his derivative creations are a Frankenstein monster. Continue reading →