Nov 17, 2008
We are teetering on the edge of a financial collapse as big as that of 1929.
Both were caused by the unbridled greed of capitalists ready to destroy their own economy in search of a quick buck to be made in speculation.
The current crisis was marked by all the crazy financial instruments that banks and brokers have created over the past ten years.
Like the mortgage-backed securities we started hearing about last March. Those “products” took bundles of mortgages, sliced them all up, mixed them all up, and re-bundled them so that no one knew what was in any of them. They sold like hot cakes, to wealthy investors who had more money than sense – until the mortgage defaults and foreclosures hit. Then, since no one could separate out good mortgages from bad ones – or even know if a particular security HAD bad mortgages in it or not – the whole pack of them became suspect. And banks and other investment companies that held them became suspect.
But that craziness comes nowhere near the insanity of the Credit Default Swap.
Credit Default Swaps (CDS’s) started out as a kind of insurance investors took out when they bought a bond, just in case the company that issued the bond couldn’t redeem it. But they morphed into a monster when Congress passed a law, and Clinton signed it, in 2000: the law made it possible for ANYONE to buy a CDS on ANY bond – whether they owned that bond or not. This turned the CDS market into a huge floating casino. The same bond could have many people taking out a CDS on it – and all expecting to get paid if it went belly up, even if they didn’t own it
It’s as if ten of your neighbors took out fire insurance on your house. They’d have a real incentive to see that your house burns down.
How huge did this crazy “insurance” system get? The total value of all the bonds “insured” by CDS’s is five trillion dollars. The total price of all of the CDS’s taken out to insure those bonds is somewhere between 50 and 60 trillion dollars – more than TEN TIMES the value of the bonds they insure!
No one really knows how many CDS’s exist, or who holds them. So once companies started defaulting on their bonds, the whole CDS market came into question.
Crazy? You bet. And until early this year, no one had even heard of either one of these crazy financial instruments that have caused so much wealth to go up in smoke.
Who knows what other bombs lie behind Wall Street’s curtain? Nobody knows – until they too start blowing up.