Have You Heard? Credit Default Swaps

Hey! Where did all that money go?

You may recall that I have previously pointed out that the current Wall Street crisis was not caused by 1) Barney Frank, 2) Democrats forcing Fannie and Freddie to give liars loans, 3) poor people not being able to pay their mortgages.

So what might have caused the massive meltdown of our credit markets? A little gift [click this link and see how it all began with Enron] from our old buddy Sen. Phil Gramm,  the insanely hard to value, unregulated market in Credit Default Swaps. Click on the link and read a Time Magazine article from March, March!, warning that the credit swap market was going to meltdown because people were investing in CD swaps. These are somewhat like insurance policies that back up other securities such as municipal bonds, corporate bonds or debt backed securites–without having any connection with the underlying security.

"They’re betting on whether the investments will succeed or fail," said Pincus. "It’s like betting on a sports event. The game is being played and you’re not playing in the game, but people all over the country are betting on the outcome."

Matt Taibbi schools Byron York on the realities of CD swaps to debunk York’s regurgitation of RNC talking points that somehow the failure of some poor people to pay their mortgages on time could somehow swamp a market as huge as the US economy. CD swaps were bet on ALL kinds of securities not just mortgage backed securities.

The CDS market exploded over the past decade to more than $45 trillion in mid-2007, according to the International Swaps and Derivatives Association. This is roughly twice the size of the U.S. stock market (which is valued at about $22 trillion and falling) and far exceeds the $7.1 trillion mortgage market and $4.4 trillion U.S. treasuries market, notes Harvey Miller, senior partner at Weil, Gotshal & Manges. "

Got that? US Stock Market=approx. $22 trillion, Mortage market = only $7.1 trillion

Swaps market????? more than $45 trillion.  Gee, which of these is more likely to have been able to swamp the entire US economy? The biggish $7  trillion wave or the HUGE $45 Trillion tsunami?

Related posts:

1. AIG: First Credit Default Swaps, Now Insurance Companies
2. Who Benefits from Financial Innovation? Not You, Silly Taxpayer
3. FDL Book Salon Welcomes Les Leopold, The Looting of America
4. In Goldman, Sachs We Trust
5. Pecora in Perspective: A Glossary of Useful Terms