Next Mega-Credit Problem Looming?

[sabra]

Source: CBS News

Experts: "Credit Default Swap" Woes Could Be Next Sub-Prime Mortgage-Like Blow To Economy

(CBS) An economy already reeling from the sub-prime mortgage mess could be in for a big hit from another type of financial instrument, experts warn.

They say possible problems in the gargantuan "credit default swap" market could cause credit-tightening and interest rate-hiking ripple effects, making it harder for consumers and companies alike to obtain credit.

CBS News correspondent Kelly Wallace explains that credit default swaps constitute a shadow financial system, out of sight and unregulated, that greases the wheels of business.

The swaps are a form of insurance, Wallace observes, with "big players -- banks, pension and hedge funds -- engaging in a high-stakes crap-shoot, trying to protect themselves if companies fail."

"This is a big one," cautions Harvard Economics Professor Kenneth Rogoff. "If this one got into trouble, it would be a big problem."

Wallace points out that the market for the exotic financial instruments has leaped, by some measures, from $1 trillion to $45 trillion -- about twice the size of the entire United States stock market.

Read more: http://www.cbsnews.com/stories/2008/02/21/earlyshow/living/money/main3856688.shtml

[ozymandius]

1. Overpaid and over-admired federal officials who created policy to allow this to happen

should be publicly humiliated over this. This would not happen without proper oversight.

That shameful waste of human flesh, Alan Greenspan, shilled for these derivative instruments to remain unregulated. Just like he encouraged first-time homebuyers to take out ARMs. Just like his delphic analysis and his presiding over an easy money Fed charmed the markets into believing that everything was gonna be alright. That is just 8% of my issue with Greenspan.

We start with him and move on. Plenty of blame to go around.

[UpInArms]

7. Ozy, I respectfully disagree

Overpaid and over-admired federal officials who created policy to allow this to happen should be publicly humiliated flogged over this. This would not happen without proper oversight.

[NashVegas]

11. There Was No Proper Oversight Because Congress Didn't Fight For the Peoples' Interests

That's the basic bottom line, IMO.

[depakid]

17. This would include Clinton era Democrats

as well as DINO's in the House and Senate, who repeatedly abandoned traditional Democratic values- not to mention good economic sense- in their pursuit of corporate money and influence.

Many of us watching at the time knew damn well what was in store (even before the LTCM meltdown) and the politicians responsible for the regulatory failures and gutting of New Deal laws designed to prevent these problems were forewarned- just as they were about enegry deregulation.

[BearSquirrel2]

19. Can you blame him ...

This economy is hemorraging jobs and the only way to keep things humming and his buddies collecting checks was to loosen credit.

[Speck Tater]

2. Intereting choice of words in the article...

... that CDSs could be the next domino to fall. Sort of implies there are more dominoes to come after that.

[Roland99]

4. Roubini mapped out 12 steps to financial disaster

The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster
http://www.rgemonitor.com/blog/roubini/242290/


(free registration required to read the full article)

[UpInArms]

12. don't forget

there is always www.bugmenot.com

for those that want to bypass registration :)

:hi:

[JuniorPlankton]

3. Another round of fearmongering

Yes, there could be problems. But the subprime meltdown was caused by low credit standards and overpriced real estate. For the CDS market to unravel, you need to have corporate defaults of the same magnitude, the entire economy going down. If that is to happen, the CDS market will be the least of our worries.

[midnight armadillo]

8. You mean like Sharper Image and Lillian Vernon?

Two retailers that just went bankrupt. There are more to come. The biggest problem with the CDS market is that both sides of the insurance deal can then sell off their contracts - when defaults happen it's really hard to find out who owns the other side of the contract. There is no regulation to force notification of the other party when one side of the contract is sold. There is no guarantee that the insurer side can actually pay out the claims.

It took General Re 4 YEARS to unwind its CDS positions when told to do so by Warren Buffet. Imagine doing that when you have a liquidity crisis and need the money from the CDS now. This is why the CDS market is so very shaky, and when a lot of defaults happen they will trigger more as the CDS market falls apart.

Maybe it's time to buy gold, sacks of wheat, and ammunition.

[JuniorPlankton]

9. No, I mean like Enron

The documents currently in place (ISDA Protocol and so on) have proved to be sufficient to withstand sizable disturbances. It MAY become unmanageable, but then it wouldn't be about the CDS.

[cliss]

18. More to come?

Count on it.
I just read yesterday's Oregonian.

Here's a quote from the article -

"You'll see a record number of bankruptcies over the next 50, 100, and 1,000 days," said Burt Flickinger III, managing director of the New York-based retail consulting firm Strategic Resource Group. "Consumers are cash and credit constrained. They're out of purchasing power."

[truthisfreedom]

5. Just a measley $45 trillion? $45,000,000,000,000? That's not a mega-credit problem.

That's not even a giga-credit problem.

That's a tera-credit problem.

TERA TERA TERA!!!!!!!!!!

[thecrow]

6. Who's in charge here?

"experts warn"

"They say"

Which experts? Who are "they"?
Has transparency gone *poof*?

[SoCalDem]

14. "the grown-ups"..remember, George told us so.. n/t

[sarcasmo]

10. Pensions are the next Domino. Kick and Nom

[FormerOstrich]

13. I'm thinkin' something

huge in Pensions, too. They were getting some notice awhile back but then the sub-prime stole the focus.

Another one I wonder about are these Student Loans made by banks like Chase. I see them advertised for like up to $50K. I don't believe they have anything to do with the federal student loans..

Seems there will be a lot of graduates in debt in a big way in a jobless market.

[SoCalDem]

15. Situations like this prove my theory.. republicans do not want to win in '08.

The know there's some serious medicine to be taken..some shock therapy due, and they are willing...hell EAGER.. to sit this one out.

They WANT democrats to be in charge..to administer the tough-love..to force us to take our meds....to raise taxes or at the very leastm re-instate the taxes in place before the cuts of GW.

They KNOW how painful the treatment will be, and that some "patients" will not survive..so they want dems to be the ones to do the "hard-werk", and then after people are still bandaging their surgical wounds, repubes will swoop back in like bats returning to the cave at dawn..and promise everyone a pony and a big birthday party with balloons & all the ice cream you can at..

[katty]

16. lots of articles coming out on this now-prepare for the worst

my friends in banking/financial services area have been warning, the writing is on the wall-their hair is on fire-brace yourself!

[unlawflcombatnt]

20. Thanks for Posting This

I'd heard about this on the news, but this article gave a lot more details. I Dugg it as well, using "$45 Trillion" in the title. That generally gets people's attention.