Saturday, October 11, 2008

Post 53a: Understanding the Word Swaps and their Role in this Financial Mess

Earlier this week, we mentioned that several former CEOs of AIG Insurance testified before the House of Representatives. During the course of that hearing, the interrogating Representatives and the CEO witnesses frequently referred to "swaps" and their risky nature.

It occurred to us that many others might not understand the concept of swaps and the role they played in our financial mess. We thought that more Americans might want to gain a better appreciation of this financial vehicle since there are "$62 trillion in credit-default swap derivatives out there. [Emphasis added.]"

One of our readers recently forwarded a September 27, 2008 article from The New York Times written by Ben Stein, entitled In Financial Food Chains, Little Guys Can't Win. In that article, Stein writes:

"[A]ccording to what I hear from my betters in the world of finance, the most serious problems are not with the bundles of subprime mortgages themselves — a large but not lethal quantum as far as I can tell — but with derivatives contracts tied to subprime and other dicey debt. These contracts are superficially an attempt to “insure” against risks of default, hence the name “credit-default swaps.” In fact, they are an immense wager — which anyone with lots of money or borrowing ability can enter — about how mortgage-backed bonds, leveraged loan bonds, student loan bonds, credit card bonds and the like will perform."

Read the remainder of the article:


  1. Bills Gates and other financial power brokers are in Davos, Switzerland in connection with the World Economic Summit. He just indicated that our economic problems will last at least 2 years, and perhaps in the 5 year range. Apparently, the Gates Foundation has been significantly negatively impacted by the economic downturn.

  2. Later today, Sunday, February 22, at 6:00 am and 2:00 pm EST, and on Monday, February 23, at 4:00 am EST, C-Span2 Book TV will air a discussion centering on the book, "Plunder and Blunder: The Rise and Fall of the Bubble Economy" by Dean Baker.

    "Mr. Baker discusses the growth and 'predictable' collapse of the housing and stock market bubbles, and is critical of both the Reagan and Clinton administrations. He details the mistakes of Alan Greenspan and Clinton Treasury Secretary Robert Rubin. He offers suggestions for preventing additional financial crises and advocates massive government spending to combat the recession."


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