DEFAULTS

Sultans of Swap: ACT III – The Getaway! Sure there are plots and strategies, but they will be noise when the $605T in derivatives start to unwind.  Yes, $605T has a $3.7T net credit exposure but there are $36T CDS (Credit Default Swaps) that must be paid and not one person has accrued a cent for that payout. Everyone expects to be ‘out of town’ by that time!  Everyone has their eye on the exit without trying to draw too much attention.  It is still former Citigroup CEO Chuck Princes’ lament:  “as long as the music is playing, you’ve got to get up and dance!“.   The Market Oracle 3/26/10

Walk Away From Your Mortgage! Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)  New York Times 1/07/10

CDS: The Sabotaging Asset I didn’t even mention yet that the CDS is the reason that you and I own AIG now. In an act of actuarial audacity AIG overwrote CDS contracts and then the worst-case scenario happened. Housing fell off a cliff. Just to make this clear the CDS brought down, to its knees, the biggest insurance company in the world and made it nothing more than a zombie. The CDS is at the epicenter of the greatest reduction in wealth in history and it isn’t even two decades old. The greatest investor ever, Warren Buffett, even got taken in by the allure and promise of the CDS. If he was fooled then how could others have avoided this sabotaging asset?  Seeking Alpha 3/08/09

Record default in speculative bonds foreseen “Standard & Poor’s expects a record 13.9% default rate for U.S. corporate speculative-grade bonds by December 2009”  Pensions & Investments 1/22/09

VIDEO: Wall Street’s Shadow Market – Credit Default Swaps Steve Kroft looks at some of the arcane Wall Street financial instruments that have magnified the economic crisis.  60 Minutes 10/5/08

Betting Against Uncle Sam: in debt markets the cost of buying insurance against a U.S. default is rising. “Credit default swaps are a wild, unregulated market – see “The $55 Trillion Question” – in which participants make bets on the failure of corporate bonds, municipal bonds and, yes, U.S. government bonds.”  Fortune 10/1/08

Credit-Default Swaps Get Messier “The credit-default swap market, rocked by multiple corporate defaults and large price moves, is causing confusion and hand-wringing among investors.  Over the past few weeks, takeovers or failures of financial institutions have forced participants to take steps to unwind or settle derivative contracts tied to hundreds of billions of dollars in bonds. Worries are mounting that some firms that sold swaps on defaulted Lehman Brothers Holdings Inc. and Washington Mutual Inc. bonds may not have enough cash to make the big payouts they promised. At the same time, differing opinions over the value of certain contracts is leading to disputes.  Wall Street Journal 10/2/08

How ‘credit default swaps’—an insurance against bad loans—turned from a smart bet into a killer. “One of the earliest CDS deals came out of JPMorgan in December 1997, when the firm put into place the idea hatched in Boca Raton. It essentially took 300 different loans, totaling $9.7 billion, that had been made to a variety of big companies like Ford, Wal-Mart and IBM, and cut them up into pieces known as “tranches” (that’s French for “slices”). The bank then identified the riskiest 10 percent tranche and sold it to investors in what was called the Broad Index Securitized Trust Offering, or Bistro for short. The Bistro was put together by Terri Duhon, at the time a 25-year-old MIT graduate working on JPMorgan’s credit swaps desk in New York—a division that would eventually earn the name the Morgan Mafia for the number of former members who went on to senior positions at global banks and hedge funds.”

What About Us? Wall Street’s problems have captured the attention of Congress, the White House and the media. But on the country’s Main Streets, worried workers, struggling small business owners and cash-strapped families are wondering if anyone is paying attention to them. A look at how Americans are coping with the economic crisis.  Newsweek 9/27/08

Latest Video on the Financial Crisis
Interactive Graphic: Major Players in Economic Crisis

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