[UncoveringTruths]

On Friday Congress finally passed - and President Bush signed into law - a financial rescue package in which the taxpayers will buy up Wall Street's bad investments.

The numbers are staggering, but they don't begin to explain the greed and incompetence that created this mess.

It began with a terrible bet that was magnified by reckless borrowing, complex securities, and a vast, unregulated shadow market worth nearly $60 trillion that hid the risks until it was too late to do anything about them.

It started out 16 months ago as a mortgage crisis, and then slowly evolved into a credit crisis. Now it's something entirely different and much more serious.

What kind of crisis it is today?

"This is a full-blown financial storm and one that comes around perhaps once every 50 or 100 years. This is the real thing," says Jim Grant, the editor of "Grant's Interest Rate Observer."

A Look At Wall Street's Shadow Market

[Duende]

This is a great piece. I HIGHLY recommend this to anyone who's never heard of credit default swaps (CDS).

[UncoveringTruths]

This is a great piece. I HIGHLY recommend this to anyone who's never heard of credit default swaps (CDS).

I watched it last night and thought to myself this is "it". The cat is out of the bag and its a mountain lion.

[TommyJefferson]

I saw that last night. It was pretty good.

I liked how the guy stumbled around when asked why the government should bail out private gamblers.

Governments rip people off. It's what they are designed to do. Hopefully people will figure that out some day.

[mattduke]

"Because you can't model human behavior with math"

Beware economics books that contain equations. Seriously.

[killJOY]

A grand fiasco, of the proportions of Greek myth.

These richest of people are stupid. They deserve to suffer for what they've done.

But WHO'S paying for it? You and me. To the tune of trillions.

[Dan1195]

Was listening to CNBC tonight. I think they did fairly well in explaining to a lay person (about the best you can anyway) the basics how the CDS market worked and how went from purely a transfer of risk to what was basically gambling, often without the funds to pay off a potential loss.

Basically it was as if someone made a bet with money (like on a ball game) with someone else not a party to the original loan, with money they didnt have. With many Trillions of dollars being bet. About the simplist way to put it. If the party that made the bet cant pay, the party the bet was made toward who is now looking for money goes after the loan holder.

..end of CNBC related discussion..

All it takes is a small number of these bets to go bad to cause trillions in losses, more than the current bailout or other FED actions to deal with. The catch-22 is one way around this is to try to keep these losses "off the books" until the losses can be spead out to maintain solvency in the relevent institutions. Of course if no one knows how much risk another party has no one is going to lend them money. Hence the seizing of the credit markets. No wonder the souring on the bailout, it is not enough to clean up the mess.

[smallpoxgirl]

All it takes is a small number of these bets to go bad to cause trillions in losses, more than the current bailout or other FED actions to deal with.

This is where I get confused. I know a lot of smart people are saying this, so I'm sure it's me just not getting it. What I don't understand is that it's a counterparty transaction. When one of these things is settled, someone writes a check to someone else. If there's trillions in loses then someone else is raking in trillions in profit, right? At the very least, someone is being protected that would have otherwise taken trillions in loses. Right? So who's getting the checks?

[Jotapay]

All it takes is a small number of these bets to go bad to cause trillions in losses, more than the current bailout or other FED actions to deal with.

This is where I get confused. I know a lot of smart people are saying this, so I'm sure it's me just not getting it. What I don't understand is that it's a counterparty transaction. When one of these things is settled, someone writes a check to someone else. If there's trillions in loses then someone else is raking in trillions in profit, right? At the very least, someone is being protected that would have otherwise taken trillions in loses. Right? So who's getting the checks?

From what I have heard, it's a closed system (an interconnected web) which works until someone defaults on a payment. Then the daisy chain completely breaks down.

[phaster]

On Friday Congress finally passed - and President Bush signed into law - a financial rescue package in which the taxpayers will buy up Wall Street's bad investments.

The numbers are staggering, but they don't begin to explain the greed and incompetence that created this mess.

It began with a terrible bet that was magnified by reckless borrowing, complex securities, and a vast, unregulated shadow market worth nearly $60 trillion that hid the risks until it was too late to do anything about them.

It started out 16 months ago as a mortgage crisis, and then slowly evolved into a credit crisis. Now it's something entirely different and much more serious.

What kind of crisis it is today?

"This is a full-blown financial storm and one that comes around perhaps once every 50 or 100 years. This is the real thing," says Jim Grant, the editor of "Grant's Interest Rate Observer."

A Look At Wall Street's Shadow Market

This might sound weird, but wondering if any of you see the current economic crisis as kind of a golden opportunity of sorts to try and educate/inform frends and family about the "peak oil" issue now that more people are interested in various topics in economics?

Was watching TV last night, the 60 minutes segment on CDS, which I've know about for a while. Anyway anyone else notice that the unknowns about the parallel banking system of subprime loans hedged with CDS are kinda akin to the unknowns about how saudi arabia, and many other parts of the world don't really know about proven oil reserves. So I've been advocating for a long time, that conservative management in terms of economic and environmental survival are the best overall course of action...

BTW this also might sound kinda weird asking a doomer crowd, but any of you see silver linings in the down market? Even thought quite a number of my own long term stock positions are down, and if I had to sell now I'd take a loss, BUT thanks to using conservative fiscal management, I still have cash left over for IMHO some great buying opportunites. Yeah, I'm kinda excited that I have the opportunity to buy oil, and gold stocks that are now much cheaper because indivdiuals and hedge funds I think are being forced to close out positions because they were too leveraged. IMHO conservative fiscal and environmental practices might not make me the richest guy around in boom times, at least in down markets like this one, savings I put away during boom times allow me to survive much better than some guy who bet the farm on only in one sector (i.e. only real estate, only gold stocks, only MRE's and lots of .223 ammo, etc.).

BTW in the interview IMHO there was lots of truth to the statement the guy said about securitization, if conservative credit standards were kept up securitization of mortgages would in the long run lower the over all risk. Same idea for CDS, if invstment banks were no so leveraged, and had better models to figure out ample reserves, we would not have so many investment banks and counter party insurance parties going down in flames.

[Duende]

Jotapay wrote:

From what I have heard, it's a closed system (an interconnected web) which works until someone defaults on a payment. Then the daisy chain completely breaks down.

Yeah, that explains the freeze up. But now that the gov't will take all the goddamn garbage left at the front door by the dirty banks, you'd think all that CDS scum could just unwind, being a zero sum equation and all.

Why is it still such a problem, a la the Dow dropping 350 like a pissed diaper today?