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« Previous Entry | Main | Next Entry » If the amount of $62 trillion is owed for credit default swaps, who or what entity eventually pays that? Name:
Marilyn Licht
Question/Comment: If the amount of 62 trillion dollars is owed for credit default swaps, who or what entity eventually pays that? Not even the U.S. government can make up for an amount which is 13 times our GDP. Paul Solman: Okay, we're back to $62 trillion, which makes me feel better, because that's the number I spread out like a patient etherized upon a coffee table, a typically low-rent device that Jon Stewart mocked last night on The Daily Show. To begin with, not every debt that's been covered is going to default. Then, and only then, would the "insurers" be on the hook for the entire tab. When a "credit event" triggers a credit default, and the holder of a credit default swap can at that point cash in on the "insurance," the party that ISSUED the swap is responsible for the payoff. Right now, since WE own AIG, we're responsible for its debts. And the worry is that if more credit defaults occur, more firms that issued credit default swaps will be unable to pay, and go under. But the government is NOT going to take over every financial entity that has written a credit default swap. Nor is every credit going to default. Not even close. -- Posted October 11, 2008 | Comments (3) | Permalink
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Not only are not all swaps going to default, but many swaps can cancel one another out. A company can write $100,000 of coverage that a default will happen adn then write another $100,000 that it will not. It's like the bad chess player playing between two grand masters. Even more, its like a bookie working Patriot and Giant fans. Of course, the writer may not have the traditioanl enforcement means that a bookie has, but some would argue that Wall Street law firms are not much different.
This is what people talk about with transparency -- you need to know who is betting on what with whom, and, when it really gets crazy, how they are mixed and matched.
As I described here (http://www.pbs.org/newshour/mt4/mt-tb.cgi/724) the major group getting killed when companies default are the stockholders. If the stockholders had not lost money (read been wiped out) or had their equity not been diluted, then these problems would not have occurred. The board of directors is responsible for looking out for stockholder interests. However too often it is a mouth piece for upper management and stock holders have little power. (That's why we have raiders.) The link describes this in more detail.
Paul,
There are several key developments that have occurred in the past several decades are having a major impact on the financial system and economy.
The loss of manufacturing due to globalization and shrinking middleclass is the underlying problem and the concomitant increase in increase in wealth by a relative few at the top is the underlying contributor to economic instability. At the same time we have had an explosion of debt creation at all levels in society to replace the income and tax revenues that were once produced by traditional means and the massive creation of mostly unregulated derivative products and their impacts on financial markets are taking their toll on confidence and creating the huge swings in the stock market. This is an unsustainable economic model.
Thank you,
Warren Seifert
Been trying to learn how one can "bet" on a credit default swap withou actually buying a policy. Who takes these "bets" what are the mechanics involved?
Joe