Word: defaultations
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...clear whether the government looked closely at commercial mortgage loans when it did its "stress tests" on banks. It is also not clear what assumptions the government used for the default rates of this paper. The $27 billion in debt that General Growth holds seems like a great deal of money. But, looking at all of the commercial real estate holdings across the country, particularly those with mortgages taken out between 2003 and 2007, and the problem is deeper than most people can imagine...
...trades the bank was making solely on its own. During a conference call with analysts and investors, Goldman CFO David Viniar said that most of Goldman's trading profits came from such liquid investments as Treasury bonds and not in the trickier markets for subprime mortgage bonds or credit default swaps, which can be harder to buy and sell. Goldman said it made very little money from CDS contracts it settled with AIG, but declined to comment exactly how its trading profits were generated. A Goldman spokesman said, "By putting the capital on our balance sheet to work...
...credit default swap is an insurance policy on an investment. Wall Street took out insurance on risky investments, like taking insurance out on your car. The party that issues the CDS agrees to insure an investment in the event of a loss, and, in return, the CDS buyer agrees to pay a monthly premium. However, a CDS is not your average insurance policy. Insurance is highly regulated, and CDSs are unregulated, creating many dangers...
...Although CDSs work like insurance for investments, buying and selling them is similar to trading stocks. This generates a hazardous web of firms that hedged bets by both buying and selling CDSs. If one firm defaults, it cannot pay out the next firm’s insurance that can cause another firm to default, and so on. To further complicate matters, since CDSs are unregulated, there is no authority to which these transactions are reported. Thus, no single firm knows how many CDS deals have been made, and firms do not know to whom most CDSs have been sold. Additionally...
...These are only a few of the issues to be fixed with credit default swaps. Although they are not innately bad instruments and can provide much-needed liquidity, when left unregulated they can be used in ways that cause tremendous detriment to our financial system. It is not surprising that investor Warren Buffet refers to credit derivatives as “financial weapons of mass destruction...