Credit Default Swaps

[angel_nieves]

I am wondering about everyone’s views on this. Do you feel that gov regulation could be a good thing for this unregulated system? Also the fall of one of the bigger banking systems i.e. Behr Sterns collapse should tax money be used as a bail out?
I feel that this current system of buying C.D.S could be the next problem in the global economy, what does everyone here feel about the topic?

 

[Harriet]

From the FI:

"I agree that the CDS market is a potential source of major trouble. Innovations on Wall St inevitably cause a few casualties (equity futures and 1987, mortgage derivatives and Orange County/ Kidder Peabody, CDOs and UBS/Merrill/C). It doesn''t get much press in the US, but the $35b debt restructuring of conduits in Canada is the first big CDS problem that I know of. Undoubtedly there will be more. There are too many whiz kid "tranche" traders on Wall St. who b-s correlation models that have yet to be tested. Fasten your seatbelts."

 

[Dee*Jay]

This is an interesting topic. As the former Chief Compliance Officer of a hedge fund manger (I left the financial industry last winter) I dealt with these in a periodic basis. The difference in my mind between a CDS and some of the other issues that are facing wall street are the parties involved. For instance the mortgage meltdown can be boiled down to the least common denominator, if you will, i.e., mom and pop, whereas these investments have much more sophisticated parties, even at the most granular (sp?) level. I''m not sayig that *will* make the scenario better in the long run, but IMHO it likely will.

As for the concept of tax money as bailout... at a fundamental level my gut reaction is "no" regardless of scenario, but I have come to understand that here is no such thing a an across-the-board reaction that always fits. For instance, as a real estate agent (which is what I am now), I look at the mortage situation and obviously as a taxpayer I don''t want to end up footing the bill for other people''s mortgages, but from a practical standpoint I see (every day) scenarios in which people recieve(d) loans that they did not understand.

 

[Miranda]

Date: 7/18/2008 10:34:36 PM
Author: Dee*Jay
This is an interesting topic. As the former Chief Compliance Officer of a hedge fund manger (I left the financial industry last winter) I dealt with these in a periodic basis. The difference in my mind between a CDS and some of the other issues that are facing wall street are the parties involved. For instance the mortgage meltdown can be boiled down to the least common denominator, if you will, i.e., mom and pop, whereas these investments have much more sophisticated parties, even at the most granular (sp?) level. I''m not sayig that *will* make the scenario better in the long run, but IMHO it likely will.

As for the concept of tax money as bailout... at a fundamental level my gut reaction is ''no'' regardless of scenario, but I have come to understand that here is no such thing a an across-the-board reaction that always fits. For instance, as a real estate agent (which is what I am now), I look at the mortage situation and obviously as a taxpayer I don''t want to end up footing the bill for other people''s mortgages, but from a practical standpoint I see (every day) scenarios in which people recieve(d) loans that they did not understand.

***slight threadjack - at least it is still regarding the financial markets

***
Well you are a good person for me to ask...I am so curious about this. Do people really NOT read their loan docs? I am hearing so many people complain that the wool has been pulled over their eyes. I always assumed they were bluffing or looking for sympathy, because, who wouldn''t read their loan docs, right? I cannot imagine somebody agreeing to pay large sums of money without reading at least the disclosures and settlement statement.

 

[Dee*Jay]

Date: 7/18/2008 10:44:51 PM
Author: Miranda

Date: 7/18/2008 10:34:36 PM
Author: Dee*Jay
This is an interesting topic. As the former Chief Compliance Officer of a hedge fund manger (I left the financial industry last winter) I dealt with these in a periodic basis. The difference in my mind between a CDS and some of the other issues that are facing wall street are the parties involved. For instance the mortgage meltdown can be boiled down to the least common denominator, if you will, i.e., mom and pop, whereas these investments have much more sophisticated parties, even at the most granular (sp?) level. I'm not sayig that *will* make the scenario better in the long run, but IMHO it likely will.

As for the concept of tax money as bailout... at a fundamental level my gut reaction is 'no' regardless of scenario, but I have come to understand that here is no such thing a an across-the-board reaction that always fits. For instance, as a real estate agent (which is what I am now), I look at the mortage situation and obviously as a taxpayer I don't want to end up footing the bill for other people's mortgages, but from a practical standpoint I see (every day) scenarios in which people recieve(d) loans that they did not understand.

***slight threadjack - at least it is still regarding the financial markets

***
Well you are a good person for me to ask...I am so curious about this. Do people really NOT read their loan docs? I am hearing so many people complain that the wool has been pulled over their eyes. I always assumed they were bluffing or looking for sympathy, because, who wouldn't read their loan docs, right? I cannot imagine somebody agreeing to pay large sums of money without reading at least the disclosures and settlement statement.

Miranda, many people who have gotten loans in recent years:

(a) have not only not read their loan docs, but were not even presented with loan docs until the point of closing, at which time they are rushed through things at light speed, and if they are lucky their hand will not fall right off their arm from signing all those forms at a rapid fire pace;

(b) would not have the capacity to truly understand their loan docs no matter how much time they had to review them;

and

(c) even if they were given an infinite amount of time to ready the loan docs would not have done so anyway.


It makes me cringe to even type this, but it is true. Of course I am not talking about every person, but I think (a), (b), (c), or some combination of those letters applies to many many many people.

 

[Miranda]

Date: 7/18/2008 10:51:03 PM
Author: Dee*Jay

Date: 7/18/2008 10:44:51 PM
Author: Miranda

Date: 7/18/2008 10:34:36 PM
Author: Dee*Jay
This is an interesting topic. As the former Chief Compliance Officer of a hedge fund manger (I left the financial industry last winter) I dealt with these in a periodic basis. The difference in my mind between a CDS and some of the other issues that are facing wall street are the parties involved. For instance the mortgage meltdown can be boiled down to the least common denominator, if you will, i.e., mom and pop, whereas these investments have much more sophisticated parties, even at the most granular (sp?) level. I''m not sayig that *will* make the scenario better in the long run, but IMHO it likely will.

As for the concept of tax money as bailout... at a fundamental level my gut reaction is ''no'' regardless of scenario, but I have come to understand that here is no such thing a an across-the-board reaction that always fits. For instance, as a real estate agent (which is what I am now), I look at the mortage situation and obviously as a taxpayer I don''t want to end up footing the bill for other people''s mortgages, but from a practical standpoint I see (every day) scenarios in which people recieve(d) loans that they did not understand.

***slight threadjack - at least it is still regarding the financial markets

***
Well you are a good person for me to ask...I am so curious about this. Do people really NOT read their loan docs? I am hearing so many people complain that the wool has been pulled over their eyes. I always assumed they were bluffing or looking for sympathy, because, who wouldn''t read their loan docs, right? I cannot imagine somebody agreeing to pay large sums of money without reading at least the disclosures and settlement statement.

Miranda, many people who have gotten loans in recent years:

(a) have not only not read their loan docs, but were not even presented with loan docs until the point of closing, at which time they are rushed through things at light speed, and if they are lucky their hand will not fall right off their arm from signing all those forms at a rapid fire pace;

(b) would not have the capacity to truly understand their loan docs no matter how much time they had to review them;

and

(c) even if they were given an infinite amount of time to ready the loan docs would not have done so anyway.


It makes me cringe to even type this, but it is true. Of course I am not talking about every person, but I think (a), (b), (c), or some combination of those letters applies to many many many people.

Really?! Well, thanks for explanation. It is what I expected, but, I still don''t understand it. Why don''t they refuse to sign until they''ve had time to review the docs. I did that once. I cannot accept ignorance as an excuse. *sigh* Folks need to responsible for themselves. So many people are running around pointing fingers. Nobody from the consumer to the mortgage companies to the government will take responsibility for the current ''housing crisis".

***sorry for the rant - threadjack over

***

 

[goldenstar]

I'm posting with great hesitation because I don't want to derail the OP. However, I really feel compelled to share another perspective.

In my area of CA, I've seen lenders prey on low income borrowers who don't speak english. The docs were presented in english and these borrowers relied on the (mis)representations of the loan officers. Furthermore, these borrowers had no business getting the loans in the first place. They wouldn't have qualified but for the lenders' sneaky tactics.

While it is true that borrowers should be certain of the consequences of their actions, it is really hard to be informed when you don't speak english and have limited resources. The playing field is very unequal in these situations.

ETA: This is just one example. There are many scenarios out there.

Sorry for the re-hijack.

 

[angel_nieves]

Goldenstar, Dee*jay, Miranda shame on you for derailing my topic.

Sorry it’s Saturday morning and I have not had my coffee yet.

Miranda, Goldenstar I nearly became a mortgage broker. I did not however due to the fact the mortgage companies was really taking advantage of the Hispanic community. I saw some very interesting uses of un-conventional credit and the pure invention of some people’s salaries. The tactics that some of the mortgage brokers used the people never really had a chance at reading and complete comprehension of the papers they where signing.

Some say that the cds market is very systemic risk. That could put the American economy even deeper in the can. I fully believe that. The estimated $250 billion in losses scare my knickers right off. You have these investors that are taking out this “protection” at a small price to them. Then when the company defaults, they get a nice sum written out to them.
Ok I need to go get my coffee.

 

[Miranda]

Haha - Macie you crack me up! Did you have coffee? I''m about to threadjack again...

Goldenstar - In CA if you cannot read English you can request an interpreter. I *think* in CA loan docs MUST be presented in English. If you cannot understand the loan docs it is my personal opinion that you should get a lawyer to explain things. The stated income loans you are speaking of are legal. Risky? Yes. Dumb? Probably. Sneaky? IMO, no. They weren''t a problem until home values began to decline - or correct, depending on how you look at it. Now, I don''t even think stated income loans exist because of the secondary market drying up. Which has compounded the problem for consumers. Again, it is my personal opinion that if you are going to make a huge financial commitment you should know exactly what you are getting into. Regardless of the language you speak or your income level. I''m not saying some mortgage companies/products aren''t part of the current problem. I just have a hard time believing folks when they throw their hands up and say, "I didn''t know." If you want information it is out there.

Another side of the coin and a constant a marketing problem is that if companies do NOT market to certain ethnic groups they are discriminating. Anyway, elaborating on that would be a really really big threadjack and I won''t do that to poor Macie!

I''ve already jacked you three times now!

Macie, it has taken me forever to get this post out because I am laughing at your avatar! It is so funny.

 

[Dee*Jay]

Goldenstar, I don''t disagree with you at all. I have seen sneaky mortgage lenders getting away with things like this, even in instances where the borrower speaks English (or whatever language the borrower speaks; in Chicago foreign speaking borrowers often seek out loans from banks in their own ethnic areas so the language barrier is no excuse, so even though the documents are in English the terms should be explained in the borrower''s native tongue.)

Macie, sorry to have furthered the derailment of your thread! I do agree with the notion that the CDS market could cause additional economic peril, but I think there are a lot of financial instruments and markets that have the ability to make more negative inpact in the current economy too. I''m not being very descriptive or detailed here (you needed coffee this morning, I need a glass of wine right now after having spent the past 9 solid hours with clients!) but think in terms of options, commodities, and hedging instruments.