Credit Swap Crisis

There was an interesting story on 60 minutes last night. Several economists, some lawyers, and even professors weighed in on the current economic crisis. Everyone has an opinion and solution in hindsight I guess. Basically what they describe is gambling and I can’t believe this bill ever passed, but it did. It was motivated by greed and lots of people benefitted from this. However, it also helped lead us into the position we are currently in.

Im not sure where I stand on government regulation frankly because I dont understand it well enough to have a valid opinion, but in my mind, these are the types of loopholes that we need to clean up. Whoever our next President is, I hope they can get us back on the right track.

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2 comments so far

  1. Arnold on

    You aren’t kidding about everyone having perfect vision in hind sight.

    People forget that when this really started, the US was a different place. Everyone was doing well and it seemed only natural to help less wealthy people get into a house. Many people would never have a house before got to qualify and ended up having real estate. Others, as we can see from the headlines, are losing their homes. In hindsight, what no one wants to say is these particular people probably shouldn’t have bought a house anyway… there is still a such thing as personal responsibility. The easy credit and the grab at the American Dream probably made it too easy to say yes to something they couldn’t afford.

  2. Mark on

    The current financial crisis is very real – and is the direct result of unbrideled Wall Street greed – facilitated by politicians that failed to exercise their oversight responsibilities.

    However – this crisis is not difficult to understand – and the solution is very straightforward and self evident.

    In short, institutional investors were uneasy buying Wall Street’s newly created mortgage backed securities – so Wall Street used the “credit swap” instrument as a way to entice investors to purchase their unproven mortgage backed securities. In other words – Wall Street sold investors an insurance policy they could use to file a claim – in the event their mortgage backed securities failed to yield as represented – and they called it a “credit swap”.

    Why did Wall Street call it a “credit swap” and not an insurance policy? Because, if Wall Street was seen as selling insurance of any kind – their business would become subject to the regulation and capital reserve requirements associated with an insurance business. Insurance companies are regulated and required to maintain capital reserve requirements – in order to pay potential claims. The Wall Street crowd (i.e. Goldman Sachs, Lehman Brothers, Bears Stearn, etc) purposely, and by design evaded this requirement – failed to set aside adequate reserves – and continued to sell “credit swaps” – knowing all the while that they would not be able to pay the claims associated with the volume of “credit swaps” they were selling. It is estimated that the unregulated “credit swap” industry is $60 trillion dollars.

    So the “credit swap” insurance policy that Wall Street created to help sell their mortgage backed securities was a sham – an empty promise – with no means of ever paying their potential claims. Investors around the world purchased these mortgage backed securities – along with the worthless “credit swaps” – and eventually began to file claims as foreclosures began to rise. Wall Street had no money to pay these claims – which sent shock waves around the world – destroyed confidence in the US financial markets – and brought our economy to it’s knees.

    Our financial crisis is a “credit swap” crisis – engineered by selfish, greedy men in Wall Street and Washington DC, who put profit before everything else – including the financial stability of the United States of America.

    It’s time for Wall Street and Congress to confess their sins – admit they are jointly responsible for this financial crisis – and stop their awkward, painful, and embarrassing attempts to conceal the true nature of this crisis by talking about everything but the problem.

    “Credit swap” claims are the problem and must be stopped immediately.

    Foreclosures are the primary catalyst driving “credit swap” claims. If you can stop foreclosures – you can stop “credit swap” claims.

    Modifying mortgage loans in order to prevent foreclosure is the most direct, targeted, and relevant use of funds option available for the $700 billion federal bailout program. Loan modifications will prevent further foreclosures – which will prevent further “credit swap” claims – which will improve balance sheets on Wall Street – and stabilize property values on Main Street.


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