What Is A CDS, And How Did It Almost Destroy Our Economy

[JoeTheEconomist]

I don't think CDS on sovereign debt is an issue at all, as the risk is baked in. The problem with CDS during the economic crisis was the exact same as MBS/CDO product, which is that risk in the housing market was not properly assessed, so investors become unknowingly over-exposed without the ability to hedge.



Yeah sure but this number is meaningless as no issuer of CDS is ever going to have to pay out on all of its product. That's the entire basis of insurance. You're basically arguing that insurance is bad, because look at how many insurance contracts United Healthcare has out, and just think about how much money it would have to pay out if everyone got cancer at once.

Higher risk assessment by insurers is offset by higher premiums and hedging exposure. It's the same with financial insurance providers.

Warren Buffett called them weapons of mass financial destruction. The problem of the CDS wasn't the same as the underlying product because the CDS removed all of the risk and put it in the hands of a single holder. The problem wasn't investors unknowingly over-exposed. It was single investor was over-exposed.

The problem here is worse because the 'investor' has to provide collateral to the agreement as it fails. The problem is that the underlying collateral is failing as well. "Higher risk assessment by insurers is offset by higher premiums and hedging exposure." assumes that the AIG knows that it has higher risk.

 

[DaveFagan]

Seriously you are not going to like the answer. 3rd Paragraph, but it will make your head explode.

Credit-default swaps: How Wall Street is gaming the Greek bailout. - Slate Magazine

The whole article makes one's head explode. The "bigger the bank, the bigger the crook," is an absolute truth. Then we don't have any regulatory agencies with balls. I think that there must be complicity with the body politic to maintain this charade. Hang 'em all! Thanks for the research. good Stuff.

 

[JoeTheEconomist]

Thanks for taking the time to compose the thoughtful replies. The effort is appreciated.

I would read the article and come to your own conclusions. There is no reasoning for allowing the banks to welch on their 'bets'. His second point is faulty as well. He really needs to explain how the people who lent money to the government of Greece are the criminals.

 

[PeteEU]

So it was of vital importance to perserve AIG which was the incompotent that started the 2008 crisis. Companies that write this stuff need to pay the price, and be driven out of business. The reason that AIG was around to write Greek CDSs was because it wasn't washed-out in 2008. As Ron White says there is no fix for stupid.

Err you got your timeline wrong and your whole story wrong.

AIG was bailed out because it issued CDS on financial assets that contained among other things US private unregulated sub-prime mortgage assets, which when housing prices started to fall because worthless. Now a company like Lehman Brothers and many other banks invested big time in this crap, but because the bad was bundled with the good and given an AAA rating, no one could in the short term figure out what the actual worth was. Hence liquidity and credit dried up big time as banks and financial institutions scrambled to meet basic liquidity requirements... and that meant a company like Lehman who lived on staying ahead of the curve.. were suddenly starved of capital and credit.. Remember Lehman was not a bank and not regulated as such, which meant the requirements were totally different. When Lehman went, then the CDS on the debt that they had were triggered. and that was AIG who had to cover it and all the bad sub-prime loans... in places like Washington Mutal and so on. Also remember that one of the conditions of TARP was that JP Morgan and Morgan Stanley and similar financial institutions were made into banks, and put under basic banking regulation which requires a certain amount of liquidity at all times.

Plus add to that, the fact that AIG was one of the biggest insurers out there, and it being wiped off the map would have meant that tons of normal insurance agreements would have been worthless overnight causing a cascade effect on top of the whole banking sector being at massive risk.

The Greek CDS on their debt was taken out in the early 2000s.. 2002-6 I believe, so had zero to do with the original melt down. But had they been triggered in 2009-10, then a week AIG, now government owned, plus other insurers like Lloyds who was also in trouble but were not really bailed out.. would have been pushed over the edge, because they would have to overnight need 100 billion in cash.. which they would not have.

 

[JoeTheEconomist]

Blaming CDO's, CDS's and investment banks for the Sub-Prime Collapse in any way is comparable to a Police Officer pulling over a speeder and then ticketing the car.

CDSs and derivitives are not intrinsically dangerous, neither are MBSs.

They were simply financial tools that were used to prop a secondary market, and a bubble built on a toxic layer of asset backed securities.

It was absolutely imperitive to the Housing Goals of the GSEs that these instruments be misused because without them there would have been no way to fund the dangerous and ever inflating bubble.

You ought to read the article. CDSs are intrinsically dangerous.

 

[JoeTheEconomist]

Err you got your timeline wrong and your whole story wrong.

AIG was bailed out because it issued CDS on financial assets that contained among other things US private unregulated sub-prime mortgage assets, which when housing prices started to fall because worthless. Now a company like Lehman Brothers and many other banks invested big time in this crap, but because the bad was bundled with the good and given an AAA rating, no one could in the short term figure out what the actual worth was. Hence liquidity and credit dried up big time as banks and financial institutions scrambled to meet basic liquidity requirements... and that meant a company like Lehman who lived on staying ahead of the curve.. were suddenly starved of capital and credit.. Remember Lehman was not a bank and not regulated as such, which meant the requirements were totally different. When Lehman went, then the CDS on the debt that they had were triggered. and that was AIG who had to cover it and all the bad sub-prime loans... in places like Washington Mutal and so on.

Plus add to that, the fact that AIG was one of the biggest insurers out there, and it being wiped off the map would have meant that tons of normal insurance agreements would have been worthless overnight causing a cascade effect on top of the whole banking sector being at massive risk.

The Greek CDS on their debt was taken out in the early 2000s.. 2002-6 I believe, so had zero to do with the original melt down. But had they been triggered in 2009-10, then a week AIG, now government owned, plus other insurers like Lloyds who was also in trouble but were not really bailed out.. would have been pushed over the edge, because they would have to overnight need 100 billion in cash.. which they would not have.

I would suggest that you read the article.

First, "AIG was bailed out because it issued CDS on financial assets that contained among other things US private unregulated sub-prime mortgage assets, which when housing prices started to fall because worthless." That is what I said in the article.

The article doesn't mention Greece. Your argument that we needed to save the AIGs of the world because of Greece. My point is the only reason that we have to save them after 2008, is because we did save them in 2008. These people didn't learn from the first pass through the process. They should have bought CDSs on themselves rather than selling more or keeping them on the books.

The question about the cascade effect seems like garden variety fear-mongering. When AIG goes into bankruptcy, the deriviative holder would be lower in line of the capital structure than joe-blow car owner.

Your entire argument can be summed up as the bond holders of Greek debt ought to get screwed rather than the US Taxpayer. This is simple theft and nothing more.

 

[PeteEU]

I would suggest that you read the article.

First, "AIG was bailed out because it issued CDS on financial assets that contained among other things US private unregulated sub-prime mortgage assets, which when housing prices started to fall because worthless." That is what I said in the article.

The article doesn't mention Greece. Your argument that we needed to save the AIGs of the world because of Greece.

Err no no no you miss understand me. Greece was mentioned by someone else I believe or I mentioned it concerning why CDS are crap, and we both agree that AIG had to be saved because of its CDS business which was massive.

And my point was not, that we needed to save the AIGs of the world because of Greece, but we did have to not trigger the CDS of which AIG had issued a lot, because that would put massive pressure on an already massively weakened insurance industry (of which a large part was already government owned thanks to the original crash), and that event could have pushed even more off the edge taking god knows what else with them.. all in the while the companies in Greeces case, who colluded with Greece to get illegal and secret debt in the early 2000s.. would come out on top with billions in profit. By not triggering the CDS, these companies took a massive loss because they were forced to write down their outstanding.

You have to remember that AIG was and still is mostly owned by the US taxpayer when the Greek situation went almost to default and triggering the CDS on its debt.

My point is the only reason that we have to save them after 2008, is because we did save them in 2008. These people didn't learn from the first pass through the process. They should have bought CDSs on themselves rather than selling more or keeping them on the books.

Then you dont understand what was happening in 2008 because your comment here makes no sense. We bailed out AIG because they, like it or not, was one of the few massive insurance companies world wide that the whole of western civilization depended on, and their fall would have brought others down with them and the effect would have been felt not only in the US but world wide... AIG is one of the major insurers in China for example. No insurance company can take 100s of billions in claims over night.. it is simply not possible and that is what would have been needed when Lehman, Washington Mutal and all the bad private sub-prime debt started to default.

Personally I would have liked to see AIG be broken up into smaller regional companies so we never would have to waste tax payer money on such a massive too big to fail company, but the end result has been that all those companies that got bailed out and caused the problems in the first place.. are even bigger now days... really sad.

Now we can most likely agree that we and they should never have been put in those situations in the first place... as in not having the ability to issue such massive amounts of CDS and other insurance products on financial instruments that were unregulated and lacked total transparency.

But that is how the CDS business was and still is.. unregulated for the most part.... estimates is that there are over 25 trillion in CDS out there.... no freaking way the insurance industry can pay 1 trillion let alone 25 trillion. They struggle to pay out on natural disasters that only count 10s of billions..

The question about the cascade effect seems like garden variety fear-mongering. When AIG goes into bankruptcy, the deriviative holder would be lower in line of the capital structure than joe-blow car owner.

Err AIG was and is more than just insurance. For one, the airline industry would be potentially grounded to a halt, since most places are leased through an AIG company, and under bankruptcy.. well those planes should be seized as part of the over all asset pool. And you would have 10s of millions of people suddenly without insurance of any kind.. not exactly a confidence builder when you hear that your bank is also going under if something is not done... And that is what we are talking about.. when the bail outs of the banks and AIG happened.. it was not as much to save these too big to fail companies as it was to stop a run on the financial industry and total Armageddon.

You have to remember the case of Northern Rock. Even though the UK government said it would seize the bank and guarantee the depositors... people still made a run on the bank and other banks that were suspected of being in the same pot. Thankfully due to a massive media campaign by the UK government and making sure that people could get their money out of Northern Rock, the run on the banks was stopped pretty quickly. So had the US government not done what it did, and the faith in the US banks collapsed, then there would be a run on all major banks and that would mean a total collapse.. which aint good.

I remember a case of BBVA, Spains second biggest bank.. a bank that is well run and has never been in trouble. But a rumour of a run on the bank cause mass panic in the markets and made stock prices drop and the media went ape ****.. for about an hour until they redfaced realized that the queues at the bank were for numbers for a marathon sponsored by the bank.

This kind of panic was wide spread during 2007-2008 and the US and world national banks needed to put confidence in the whole world wide banking system.. which they did.

My regret is that those that caused the panic were never punished.. but that is how it is.

Your entire argument can be summed up as the bond holders of Greek debt ought to get screwed rather than the US Taxpayer. This is simple theft and nothing more.

No that is simply not true and you are mis-representing the facts. HAD Greece defaulted then it would have been the US taxpayer that would be paying those CDS to banks like Morgan Stanley and JP Morgan... because AIG was mostly owned by the US taxpayer. Because they were NOT triggered, then those private run banks and many private run banks across Europe were forced to write down their debt so not to burden the tax payer and only the stockholders of said banks. The fact is, by not triggering the CDS on Greek debt, the US taxpayer saved billions.

So it was totally political. The Eurozone and IMF plus indirectly the US Fed knew that a trigger of the CDS on Greek debt would have been a political nightmare that would have crushed any confidence left in the US banking industry and the outrage both internally and externally against the US banks earning billions on the default on the US taxpayer expense .. would have been mindboggling... fun to watch kinda though..

Also remember, by the time the Greek debt crisis came to the point where the CDS could be triggered.. this was in 2009-10. Those CDS were issued long ago... before the crisis in 2007-9 started.. and unless you want to throw out basic contract law.. then you cant go back on the agreements made back then.

 

[Fenton]

You ought to read the article. CDSs are intrinsically dangerous.

I did.

In direct reference to the Sub-Prime Collapse they were simply one of the tools used to perpetuate the funding of the secondary market.

There were many other aspects and devices that were far more destructive and culpable.

Bottom line, in the 90s the false narrative of redlining was constructed, banks were threatened with legal action if they didn't play ball, and the GSEs were infiltrated with criminals and destructive policies.

Had it not been for the Government mandated guaranteed buyer, Fannie Mae, banks would not have survived into the 2000s, but HUD was given regulatory control over Fannie and Freddie and the GSEs were given a rising quota of bad loans to purchase that started at 30% in 1992, and stopped at 57% in 2006.

In 2000, Secretary of HUD Andrew Quomo committed 2 Trillion dollars to the buying up of "affordable loans".

In 1997, Fannie started securitizing low quality loans and held 1 TRILLION in privately created MBSs backed by low quality loans by 2004.

 

[JoeTheEconomist]

Then you dont understand what was happening in 2008 because your comment here makes no sense. We bailed out AIG because they, like it or not, was one of the few massive insurance companies world wide that the whole of western civilization depended on, and their fall would have brought others down with them and the effect would have been felt not only in the US but world wide... AIG is one of the major insurers in China for example. No insurance company can take 100s of billions in claims over night.. it is simply not possible and that is what would have been needed when Lehman, Washington Mutal and all the bad private sub-prime debt started to default.

This is not the 2008 issue. The larger problem here is why was AIG writing CDS insurance on Greek debt after the bail-out. If this was carry-forward exposure why wasn't there some offsetting hedge put in place to protect the company. It is as though they learned nothing. We saved them once. Within a year they were back at the same problem.

If these contracts were written by company while it was owned by the government, then yes the US taxpayer deserves to lose everything. If the government failed to mitigate the exposure, the taxpayer deserves to lose whatever the cost. Sorry, I don't share your sympathy here. It is simple theft. I am not sure why you think that this is a major holding of US banks. I thought that the problem was Eurozone banks. In either case, they deserve to be paid.

 

[PeteEU]

This is not the 2008 issue. The larger problem here is why was AIG writing CDS insurance on Greek debt after the bail-out.

Who said they did? And even if they did.. it is their business.. insurance and as long as CDS insurance is legal, then they will do it, because it is highly profitable.

If this was carry-forward exposure why wasn't there some offsetting hedge put in place to protect the company. It is as though they learned nothing. We saved them once. Within a year they were back at the same problem.

Again the CDS on Greek debt were taken out before they got in trouble. Why do you continue to ignore this very important fact?

If these contracts were written by company while it was owned by the government, then yes the US taxpayer deserves to lose everything.

Again, most if not all were written by the company before it was government owned.

If the government failed to mitigate the exposure, the taxpayer deserves to lose whatever the cost. Sorry, I don't share your sympathy here. It is simple theft.

Again you dont read. The government did not loose anything! AIG did not pay out CDS.. hence the US tax payer did not loose anything other what it paid for the original AIG bailout after Lehman and the near collapse of the US banking system.

I am not sure why you think that this is a major holding of US banks.

Never said it was, I said it was 2 US banks (at the time financial institutions not banks) who issued the bad debt to Greece and took out CDS on these. This bad debt and the active whisper campaign against Greece by these 2 financial institutions (in order to trigger the CDS they owned) was what basically pushed Greece over the edge.

I thought that the problem was Eurozone banks. In either case, they deserve to be paid.

Why on earth do they deserve to be paid? We already bailed out several of them and now we should give them massive profit on the taxpayer dime? Hell no. That is politically impossible.. and remember it would be on the US taxpayer dime for a large portion of the CDS.

Plus regardless someone has to pay for it. Either you pay the CDS, in which companies like AIG (and hence the US taxpayer) has to pay out 50+ billion to the banks, or you force the banks to take a haircut and not trigger the CDS as a defacto punishment for the actions they took in the early 2000s that caused the crisis in the first place. The difference is clear.. the 50+ billion comes out of a few companies like AIG, where as the haircut is spread out like a thin stinky piece of crap across many many banks across the planet.. far easier to absorb, especially since most banks had already written off Greek debt in their balance sheet.

 

[JoeTheEconomist]

Who said they did? .

Technically you were the one that brought up 2008 ... "Then you dont understand what was happening in 2008 because your comment here makes no sense."

Why do I keep ignoring the fact that the Greek debt was older than 2008 .

Because it doesn't matter. It isn't relevant how old the Greek debt was. It actually doesn't even matter how old the CDSs were.

First, AIG was according to a German paper a major writer of CDSs on Greek debt after 2009. So I am not sure that you have your facts straight.

Second, even if the CDSs were written prior to 2008, IT DOES NOT MATTER. The government when it took over AIG should have dealt with the exposure.

When the CDS contracts were written is IRRELEVANT, when the crisis hit the 'insurer' was unable to fulfill its commitments. Who owns the insurer is not relevant. The Insurer should be forced to pay-off its oblgiations. Who owns the CDSs is not relevant. You say it was Chase and other US banks. Even if it was, they are entitled to be paid for buying risk-protection that our government was dumb enough to sell or dumb enough not to manage.

In the case that seems to be described in the German paper, ie AIG was continuing to sell CDSs on debt it did not understand, in 2008 we preserved AIG from its own stupidity, so that it could continue to do the same thing again. This only demostrates that the bail-out of AIG was foolish beyond words.

 

[JoeTheEconomist]

Again you dont read. The government did not loose anything! AIG did not pay out CDS.. hence the US tax payer did not loose anything other what it paid for the original AIG bailout after Lehman and the near collapse of the US banking system.

Again, you don't read. I didn't say that the government did lose anything. I said that AIG - ie the government - should have had to pay.

Why on earth do they deserve to be paid? We already bailed out several of them and now we should give them massive profit on the taxpayer dime? Hell no. That is politically impossible.. and remember it would be on the US taxpayer dime for a large portion of the CDS.

The government owned AIG, and yes it should be paid. I have signed dumb agreements in the past, and the government would have held me accountable. So again, I have no sympathy here. If the Obama Administration falls because it sold CDSs through AIG or simply failed to manage those that it inherited - so be it. What you are saying is that it is justified theft.

I said it was 2 US banks (at the time financial institutions not banks) who issued the bad debt to Greece and took out CDS on these.

You are talking about Goldman Sachs. This article says that it wasn't 'bad debt'. The problem was that Goldman helped Greece hide its debt off-balance sheet - according to the article. Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules.

Greek Debt Crisis: How Goldman Sachs Helped Greece to Mask its True Debt - SPIEGEL ONLINE

 

[PeteEU]

Second, even if the CDSs were written prior to 2008, IT DOES NOT MATTER. The government when it took over AIG should have dealt with the exposure.

How exactly? Pumping even more money into AIG? Or by declaring that they were null and void and taking it to court?

When the CDS contracts were written is IRRELEVANT, when the crisis hit the 'insurer' was unable to fulfill its commitments. Who owns the insurer is not relevant.

In the case of AIG it is hella relevant...

The Insurer should be forced to pay-off its oblgiations.

And in the case of AIG it would mean another bailout... as in more tax payer money.

Who owns the CDSs is not relevant.

It is very relevant if there is criminality involved. If a holder of CDS actively pushes for a default after having sold the debt to the potential defaulty.. then it is hella relevant.

That would be like selling you life insurance and the insurance company being the beneficiary and at the same time the insurance company is trying to kill you..

You say it was Chase and other US banks. Even if it was, they are entitled to be paid for buying risk-protection that our government was dumb enough to sell or dumb enough not to manage.

Again you are getting the time lines wrong. The government did not own AIG when the original CDS on the secret loans was taken out and it was those CDS that are a problem, not the later ones when the cluster**** was already unfolding. It is the original CDS and secret loans that in large part caused the lack of trust in Greece and much of the original Greek problem... because it was out right manipulation of the interest rate on Greek bonds from the day the secret loans were given till they were found out by the EU and IMF.

Also, AIG might have been government owned but like RBS, it was run as a private company, meaning there was very little input from the government.

In the case that seems to be described in the German paper, ie AIG was continuing to sell CDSs on debt it did not understand, in 2008 we preserved AIG from its own stupidity, so that it could continue to do the same thing again. This only demostrates that the bail-out of AIG was foolish beyond words.

That is a whole other matter and has no real relevance to what we are discussing with the Greek debt. There has been next to no private held Greek debt since late 2010 early 2011 and hence no CDSs.. That AIG continues to sell CDS on debt is part of their business model (and other companies) and is pretty much free cashflow for them as long as we dont hit another catastrophic meltdown. That the US government did not stop AIG from issuing CDSs or even push for regulation of the CDS market... the GOP were opposed to it if I remember right, is well.. something you should ask your congressman and President.

As I have stated, if it was up to me, CDSs would be heavily regulated and in some cases banned.

 

[PeteEU]

Again, you don't read. I didn't say that the government did lose anything. I said that AIG - ie the government - should have had to pay.

Which would be a loss for AIG and the US government and hence the US taxpayer.

The government owned AIG, and yes it should be paid. I have signed dumb agreements in the past, and the government would have held me accountable. So again, I have no sympathy here. If the Obama Administration falls because it sold CDSs through AIG or simply failed to manage those that it inherited - so be it. What you are saying is that it is justified theft.

You are simply not understanding the situation and your hatred of Obama seems to cloud your judgement. You also fail to realize that AIG does not have the cash to pay out on its CDS, because the market is unregulated, which means that AIG would require another massive backstop of cash.

You are talking about Goldman Sachs. This article says that it wasn't 'bad debt'. The problem was that Goldman helped Greece hide its debt off-balance sheet - according to the article. Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules.

Ahh yes Goldman Sachs.. always get those 3 mixed up. My bad... but my point stands as I stated in the other reply why.

 

[head of joaquin]

I did.

In direct reference to the Sub-Prime Collapse they were simply one of the tools used to perpetuate the funding of the secondary market.

There were many other aspects and devices that were far more destructive and culpable.

Bottom line, in the 90s the false narrative of redlining was constructed, banks were threatened with legal action if they didn't play ball, and the GSEs were infiltrated with criminals and destructive policies.

Had it not been for the Government mandated guaranteed buyer, Fannie Mae, banks would not have survived into the 2000s, but HUD was given regulatory control over Fannie and Freddie and the GSEs were given a rising quota of bad loans to purchase that started at 30% in 1992, and stopped at 57% in 2006.

In 2000, Secretary of HUD Andrew Quomo committed 2 Trillion dollars to the buying up of "affordable loans".

In 1997, Fannie started securitizing low quality loans and held 1 TRILLION in privately created MBSs backed by low quality loans by 2004.

Oh dear God, the CRA meme!

CRA prevented banks from discriminating against QUALIFIED borrowers based on zip code (i.e., race). Not one bad loan resulted from CRA.

Only in teaparty bizarroworld does it hurt banks to require them to lend to QUALIFIED borrowers. Perfect teabaggery.

 

[JoeTheEconomist]

Which would be a loss for AIG and the US government and hence the US taxpayer.



You are simply not understanding the situation and your hatred of Obama seems to cloud your judgement. You also fail to realize that AIG does not have the cash to pay out on its CDS, because the market is unregulated, which means that AIG would require another massive backstop of cash.



Ahh yes Goldman Sachs.. always get those 3 mixed up. My bad... but my point stands as I stated in the other reply why.

I haven't mentioned Obama in any of this.

We have a basic disagreement. Contracts should be honored. Our government saved a business that nearly caused a financial crisis. We are responsible for that same business nearly causing another crisis. So yes I realize that AIG would have needed more cash - I am not sure why you think I don't.

 

[Fenton]

I haven't mentioned Obama in any
of this.

We have a basic disagreement. Contracts should be honored. Our government saved a business that nearly caused a financial crisis. We are responsible for that same business nearly causing another crisis. So yes I realize that AIG would have needed more cash - I am not sure why you think I don't.

It wasn't the banks or the CDSs that caused anything.

Privately created MBSs backed by sub-prime loans didn't come into existence until 2002, and by the 2008 at the time of the collpase, sub-prime loans backed by private institutions only consisted of 30% of all sub-prime, Alt-A and CRA loans.

The other 19.2 million belonged to the GSEs, and namely Fannie who began turning low quality loans into securities in 1997.

Fannie and Freddie, who up until the Conclusion of a SEC investigation after the collapse reported only 600 billion in sub-prime and alt-a debt. According to the SEC their actual exposure equaled 1.6 trillion.

Fannie and Freddie misreported over 10 billion in profits from 1998 to 2004 under the leadership of Franklin Raines who was fined millions for his corruption.

6 of their top executives, Clinton appointees were charged with Securities fraud in 2011.

Fannie and Freddie was allowed to manipulate the value of their own " AAA " Securities, ( and the market ) all the way up to the collapse and CDSs were how Investment banks, mandated by SEC regulations to do so, collateralized those securities while they were sellinv them off.

Without the sale of those securities, who's true value was never ascertained, there would have been no way for the GSEs to finance the Sub-Prime market

I mean TARP is chump change.

Fannie and Freddie when taken into Consrvatorship in 2008 held 5.4 TRILLION in Sub-Prime and Alt-A loans and or securities backed by Sub-Prime loans.

Most of that is backed by collateral that was subjectively valued by Fannie and Freddie through the manipulation and withholding of their true debt.

 

[JoeTheEconomist]

It wasn't the banks or the CDSs that caused anything.

Privately created MBSs backed by sub-prime loans didn't come into existence until 2002, and by the 2008 at the time of the collpase, sub-prime loans backed by private institutions only consisted of 30% of all sub-prime, Alt-A and CRA loans.

The other 19.2 million belonged to the GSEs, and namely Fannie who began turning low quality loans into securities in 1997.

Fannie and Freddie, who up until the Conclusion of a SEC investigation after the collapse reported only 600 billion in sub-prime and alt-a debt. According to the SEC their actual exposure equaled 1.6 trillion.

Fannie and Freddie misreported over 10 billion in profits from 1998 to 2004 under the leadership of Franklin Raines who was fined millions for his corruption.

6 of their top executives, Clinton appointees were charged with Securities fraud in 2011.

Fannie and Freddie was allowed to manipulate the value of their own " AAA " Securities, ( and the market ) all the way up to the collapse and CDSs were how Investment banks, mandated by SEC regulations to do so, collateralized those securities while they were sellinv them off.

Without the sale of those securities, who's true value was never ascertained, there would have been no way for the GSEs to finance the Sub-Prime market

I mean TARP is chump change.

Fannie and Freddie when taken into Consrvatorship in 2008 held 5.4 TRILLION in Sub-Prime and Alt-A loans and or securities backed by Sub-Prime loans.

Most of that is backed by collateral that was subjectively valued by Fannie and Freddie through the manipulation and withholding of their true debt.

Fannie and Freddie when taken into Consrvatorship in 2008 held 5.4 TRILLION in Sub-Prime and Alt-A loans and or securities backed by Sub-Prime loans.

The obvious answer is that the GSEs didn't start or increase the financial crisis. They were backed by the US government when the government took over the businesses. No one was but the government was affected. The bonds were more valuable the day after the takeover.

The problem was derivatives particular CDS because of the degree of leverage baked into them. The GSEs were backed by the government. AIG owned the sub-prime CDS market.

Keep in mind that roughly a year after the financial crisis. AIG almost returned to bankruptcy over CDS on Greek debt.