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Did you like the financial crisis of 2008?

Discussion in 'Sports and News' started by poindexter, Dec 17, 2014.

  1. The Big Ragu

    The Big Ragu Moderator Staff Member

    People have gotten too hung up on these instruments. Credit default swaps likely won't precipitate the next crisis. ANY financial instrument can create a financial crisis when there is rampant speculation being fueled by borrowing and leverage. It isn't the CDS market that is a problem. It is too much leverage.

    But to answer your question, simply think of a credit default swap as insurance. It is not much different than when you buy an insurance policy -- say your car insurance. You pay regular premiums that insure you in case of an event (a car accident).

    In the case of a CDS, you are buying insurance on someone's debt -- that they won't default on a loan. The buyer of the CDS pays premiums to insure a loan. If whoever was borrowing on the loan the CDS covers defaults, the seller of the CDS has to pay off the face value of the loan.
     
  2. cranberry

    cranberry Well-Known Member

    Chipping away a Dodd-Frank provision hits a nerve but a pretty broad range of economists don't seem up in arms over this and damned if I can figure out the end game, so I'll take their word for it.
     
  3. doctorquant

    doctorquant Well-Known Member

    This morning I did a bit of research into cleared/clearable CDSs ... as I understand it, cleared/clearable CDSs involve a central clearinghouse that acts as an intermediate counterparty to both sides of a CDS trade. So if A wants to buy a CDS from B, in essence B will sell to the clearinghouse while the clearinghouse simultaneously sells to A. This, ostensibly, reduces the risk to A of B being able to live up to its end of the deal, because the clearinghouse is also on the hook.

    Apparently some portion of CDSs aren't (or can't be) routed through approved clearinghouses*, and these were subject to that portion of the Dodd-Frank rules at play in this story. That is, FDIC-insured firms couldn't trade in CDSs that aren't cleared through clearinghouses; they'd have to "push" these out to their non-FDIC insured subsidiaries. This change eliminates that requirement. What I've read suggests that these make up a very small portion of firms' derivatives trading.




    *You could probably make the case that these Dodd-Frank rules had the effect of creating another group of well-positioned insiders (i.e., those firms given license to play the role of clearinghouse and ultimately enjoying the economic rents accompanying that license). Sigh ... it's always something! :D
     
  4. doctorquant

    doctorquant Well-Known Member

    Yep, that about sums it up.
     
  5. YankeeFan

    YankeeFan Well-Known Member

    I don't like the idea of anything new being funded, defunded, or changed in these lame duck sessions. If they need to bass a bill to fund the government, they shouldn't do anything more than fund it at current levels.

    I also don't like anything being "slipped into" "must pass" bills.

    The fact that something can be put into a bill, and no one knows who put it there makes me fucking crazy.

    And, I don't like any of this being done behind closed doors, with no debate, and then passed before the public has a chance to read, or react to the proposals.
     
  6. The Big Ragu

    The Big Ragu Moderator Staff Member

    There is no need for an intermediary. The regulations they pushed through after 2008 put pressure on derivatives traders to trade via clearinghouses -- who knows how much the Options Clearing Corp. paid in campaign contributions to get a government-enforced piece of every transaction?

    But the fact is, you don't need a clearinghouse (or even an exchange) to perform most of these transactions. And trying to force that on the participants in those markets does zilch. It's just meddling. The markets for them are not that liquid. You can perform most of the transactions by telephone, really.

    Either way, the question is, why are we putting everyone in the country on the hook for what are PRIVATE, and often very speculative, financial transactions that should ONLY REWARD OR PUNISH THOSE INVOLVED? It doesn't matter which transactions the mess of legislation covers, and which they don't (and it is more money than you are understanding, anyhow). When you (as in DQ) trade options, if you lose money, why don't you get subsidized for your losses from the U.S. Treasury (at the expense of everyone else in the country)? This is no different.

    And do we really want a system of government that is picking winners and losers that way and rewarding failure at the expense of everyone else?
     
  7. bigpern23

    bigpern23 Well-Known Member

    Agreed on all counts.
     
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