OK, one more rant (suggestion) about our financial system.
Undoubtedly you have heard some talk about the “credit –default swaps” that have crippled many large firms including AIG, an insurance behemoth that was “too big to let fail”.
The hardest thing for me is to accurately define this financial instrument. I have a “derivative swap” arrangement with my bank when I bought the factory building five (5) years ago. It is kind of complicated but in essence it is a protection for both me and the bank against crazy interest rate fluctuations; sometimes I pay extra and sometimes the bank pays extra, keeping both of us in a controlled interest rate spread. This is a valid financial instrument that is of benefit to both mortgage parties.
The “credit-default swaps” that are causing all the trouble appear, as the name suggests, an insurance policy “against” the possibility that a loan will not be paid back. Well it appears that a logical financial instrument has morphed into something no one understands anymore.
The Wall Street Journal and the New York Times tried to define the “credit-default swap” as a “side bet” indicating that the person purchasing the swap is not a principal in the credit/loan transaction to begin with?
The example they use is if “you” purchased a fire insurance policy on your neighbor’s house. Let us say the neighbor’s house is worth $100,000 but the policy you bought will pay you $500,000 if the neighbor’s house burns. And lets say that your neighbor’s house does burn and you file your claim with the company that issued the policy but that company has no funds to pay off the policy because since the “swap” policy is an “unregulated” financial instrument, no capital requirements were in place.
I realize this is a rather complicated concept to grasp and I don’t want to suggest that the “swaps” were all about fire insurance, they were not, but policies worth TRILLIONS $$$$ were taken out and when companies like AIG could not make good on the policies because they had no capital to back them up, the FEDs had to step in with BILLIONS of taxpayer dollars to keep it afloat.
The more I delve into this chaos, the more pissed off I get thinking that the men and women that got us into this were supposed to be smart, knowledgeable professionals who let greed and the absence of regulation, take over their actions. Some are starting to ask, where was their sense of responsibility, sense of fairness, sense of proper business practices but all indications are that these people went berserk like children in a candy shop.
For right now either regulate the living shit out of the practice or ban it altogether by making it illegal. The “swap” policies are nothing but betting or gambling by supposed “investors” and these people are nothing of the sort; they are gamblers exploiting the lack of oversight by our government and financial system.
People need to pay for this debacle and not rewarded by bailing their asses out.
Undoubtedly you have heard some talk about the “credit –default swaps” that have crippled many large firms including AIG, an insurance behemoth that was “too big to let fail”.
The hardest thing for me is to accurately define this financial instrument. I have a “derivative swap” arrangement with my bank when I bought the factory building five (5) years ago. It is kind of complicated but in essence it is a protection for both me and the bank against crazy interest rate fluctuations; sometimes I pay extra and sometimes the bank pays extra, keeping both of us in a controlled interest rate spread. This is a valid financial instrument that is of benefit to both mortgage parties.
The “credit-default swaps” that are causing all the trouble appear, as the name suggests, an insurance policy “against” the possibility that a loan will not be paid back. Well it appears that a logical financial instrument has morphed into something no one understands anymore.
The Wall Street Journal and the New York Times tried to define the “credit-default swap” as a “side bet” indicating that the person purchasing the swap is not a principal in the credit/loan transaction to begin with?
The example they use is if “you” purchased a fire insurance policy on your neighbor’s house. Let us say the neighbor’s house is worth $100,000 but the policy you bought will pay you $500,000 if the neighbor’s house burns. And lets say that your neighbor’s house does burn and you file your claim with the company that issued the policy but that company has no funds to pay off the policy because since the “swap” policy is an “unregulated” financial instrument, no capital requirements were in place.
I realize this is a rather complicated concept to grasp and I don’t want to suggest that the “swaps” were all about fire insurance, they were not, but policies worth TRILLIONS $$$$ were taken out and when companies like AIG could not make good on the policies because they had no capital to back them up, the FEDs had to step in with BILLIONS of taxpayer dollars to keep it afloat.
The more I delve into this chaos, the more pissed off I get thinking that the men and women that got us into this were supposed to be smart, knowledgeable professionals who let greed and the absence of regulation, take over their actions. Some are starting to ask, where was their sense of responsibility, sense of fairness, sense of proper business practices but all indications are that these people went berserk like children in a candy shop.
For right now either regulate the living shit out of the practice or ban it altogether by making it illegal. The “swap” policies are nothing but betting or gambling by supposed “investors” and these people are nothing of the sort; they are gamblers exploiting the lack of oversight by our government and financial system.
People need to pay for this debacle and not rewarded by bailing their asses out.
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