good question Credit Default Swaps

[David Farber <dave () farber net>]

________________________________________
From: Erik Cecil [erik.cecil () gmail com]
Sent: Wednesday, April 02, 2008 1:13 PM
To: David Farber
Subject: Re: [IP] Credit Default Swaps

Dave,

I for one, am not terribly sophisticated on these issues.  I assume there are others in the same boat.  So while I 
don't know if this is a question for the list, it's possible that others may be wondering how this sort of analysis is 
no different than adding up the value of all bets placed on the Superbowl and claiming that after the event, millions 
of dollars (i.e. at least twice the value of the money actually exchanged b/c you're counting both sides of the 
transaction) were bet & no one really knows how much was "lost" (i.e. some are straight bi-lateral bets, others placed 
with odds-makers / bookies, some legal transactions, some not, etc.).

If that's correct, then isn't it true in an ultimate sense that only some portion of the $45 trillion really matters to 
the economy?

IOW, how can you bet more than twice the amount of money than there exists in the entire U.S. economy?   Would it be 
accurate to look at this as the mother of all ponsi schemes such that lots of individual bottom lines may be affected 
but the money, in and of itself, didn't go away?  Rather, it means that that the last one to receive cash wins?   The 
rest "lose" money, but relative to the entire economy, again, money just moved around?  Is there also potential, over 
the longer term, that individuals and businesses can also use those "losses" to offset taxes?

By asking these questions, I'm not taking any position at all; I simply attempting to grasp what it means when someone 
says $45 trillion is in play, but the U.S. economy = $22 trillion.

With every best wish,

Erik Cecil

On Wed, Apr 2, 2008 at 7:16 AM, David Farber <dave () farber net<mailto:dave () farber net>> wrote:

________________________________________
From: Andrew C Burnette [acb () acb net<mailto:acb () acb net>]
Sent: Wednesday, April 02, 2008 9:02 AM
To: David Farber
Subject: Credit Default Swaps

Dave, for IP if you wish.

Credit Default Swaps

Heard an interesting broadcast on Marketplace (a PRI radio program;
April 1, 2008) on the issue of Credit Default Swaps. Interesting aspect
is that nearly 45T USD of these are "in play" in the market.

According to the discussion, The Bear Sterns buyout may have been a self
saving mechanism for JPmorgan, as the risk of Bear Stern's failure
becomes a risk of collapse for the holders of these guarantee
certificates.  Perhaps JP Morgan saw a risk exposure due to their own
trades with Bear Sterns.

Very interesting financial instrument, intended to spread risk around
("probably the most important instrument in finance," according to
former Fed chair Alan Greenspan), however, when many begin to suffer,
there's little assurance that any of the other holders of these swaps
may be actually able to back up a default.

 From the program transcript:

The value of the entire U.S. Treasuries market: $4.5 trillion.

The value of the entire mortgage market: $7 trillion.

The size of the U.S. stock market: $22 trillion.

OK, you ready?

The size of the credit default swap market last year: $45 trillion.

http://marketplace.publicradio.org/display/web/2008/04/01/credit_default_swaps_q/



-------------------------------------------
Archives: http://www.listbox.com/member/archive/247/=now
RSS Feed: http://www.listbox.com/member/archive/rss/247/
Powered by Listbox: http://www.listbox.com

-------------------------------------------
Archives: http://www.listbox.com/member/archive/247/=now
RSS Feed: http://www.listbox.com/member/archive/rss/247/
Powered by Listbox: http://www.listbox.com