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: http://www.nytimes.com/2008/09/28/business/28every.html?_r=1&ei=5070&oref=slogin&emc=eta1&adxnnlx=1223740921-R1il7UykUJKI/O7CnpNPmw&pagewanted=print