Re: MSNBC Greenspan

Bill,

Good find, thanks. Quite oversimplified, but not doing so would be very
difficult to understand. It's actually a far more complex issue.

Basically, CDSs amplify both upsides and downsides of spreading risk by
buying "default insurance" on bonds held. On one billion dollars worth of
bonds, the CDSs written on it could easily reach a value of 10 billion
dollars. A default with a 50-cent per dollar recovery in the bond would cost
the actual bond holders 500 million, but could cost the CDS holders 5
billion. Thus, a 0.5 billion dollar loss in the collateralized debt could
result in a 5 billion dollar actual loss to investors .

There is really no practical limit on what people can (and do) do with these
things. I like Warren Buffet's description of them as "financial weapons of
mass destruction". Because the CDS system's value exceeds the value of even
the Stock Market, the consequences of a collapse are unthinkable.

Thus, the_system_must_not_be_allowed_to_fail, and I think you saw that with
the Bear Sterns. Bear was not in any more real trouble than many investment
banks, but their counterparties in CDSs balked, and a collapse would have
had serious and far-reaching effects well beyond Bear Sterns. Thus, of
necessity, the Fed overstepped its charter.

I think whatever needs to be done will continue to be done, because,
whatever the consequences of doing so are, they pale in comparison to the
consequences of a collapse.

As for who pays for all this, well, you _know_ who will pay for it.

Take a look at http://en.wikipedia.org/wiki/Credit_default_swap if you want
more, and the daunting mathematics of probablility required to fighre out
just what a given CDS is worth.

Allan

--
One asks, many answer, all learn -- Plato, on the 'Forum
---
True civility is when every one gives to every other one every right
that they claim for themselves.

"WeathermanBill" <no@xxxxxxxx> wrote in message
news:hAX8Ryv5+iwH3j5LuARHcLJxV3=V@xxxxxxxxxx
So Greenspan says that "credit default swaps" are good deals as these
instruments spread risk. Heard of CDOs but not CDSs so found this
http://www.time.com/time/business/article/0,8599,1723152,00.html


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