[IP] Re: good question Credit Default Swaps

[David Farber <dave@farber.net>]

________________________________________
From: Charles Brown [cbrown@flyingcircuit.com]
Sent: Thursday, April 03, 2008 7:17 PM
To: David Farber
Cc: Charles Brown
Subject: Re: [IP] Re: good question Credit Default Swaps

Dave,

The writer below leaves out a couple of significant points, to wit:

1)  The problem isn't necessarily with the underlying debt, unless companies start going under en masse.   The bad mortgage loans were the catalyst of the exposure of the derivatives market, and simultaneously fed that market with new products.  The problem is simple:  Wall Street created money in the economy and then took big cuts of it as fees.  I haven't had extensive dealings with investment banks, but I have never seen one do anything for less than 5-10% of the principal of the deal.  So say 7% X $500 trillion = $35 tril., approx. 1.5 times the US GDP of about $14 trill.

2)  They take all of the profits with practically zero risk since the Fed is bailing them all out, that being of no surprise at all to anyone.  "We have to do it" says Bernanke and the chorus of economists.  Remember, these are investment banks, not commercial banks.  The Fed is under no obligation to bail any investment bank, hedge fund, or any other non-FDCI insured entity.  "But it's a systemic crisis!" they shout.

Why is it we don't hear about possible scenarios, like what happens if the investment banks can't raise the capital they need and are allowed to fail?  We hear, "Oh, it's too horrible to contemplate."  How come no discussion?  Perhaps because these actions are predetermined?

It seems the Wall Street crowd (including the Fed) are great proponents of free markets until their greed threatens their own existence, or ability to do it again, which you can be assured they will if given the opportunity.  In fact, the Fed is just a vestige of the political power.

In the meantime, one out of eight people in Michigan is on food stamps, bread and dairy products and other staples are increasing monthly due to  inflationary pricing pressures, and since the derivatives scam is all played-out they are now back to the good ole energy markets again.  Oil companies are racking-up record profits.

It's simple amazing what people sit still for in this country.

Charles Brown




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