Saturday, October 11, 2008

THE FUTURE BBC: "A Norwegian politician has said she will not seek re-election after running up a large phone bill ringing fortune-tellers at parliament's expense. Saera Khan, an MP for the ruling Labour Party, admits calling pay-per-minute fortune-tellers 793 times in one nine-month period, for a total of 133 hours." While some are messing around with futures, playing casino, others are looking in the crystal ball for solutions to political problems. If they'd only have a good look in the mirror. The reality: MoonOfAlabama: "Declare all credit default swabs null and void: At the bottom of the inverted financial pyramid are overvalued land, wood tructures, dry walls and granite countertops - i.e. cheaply over-build houses. These were sold to people who could only afford them with mortgages that had unrealistic starting conditions and on the premise that housing prices would continue to rise forever. These mortgages were bundled, sliced and diced into Mortgage Backed Securities and sold to investors. Home equity loans, car-loans and credit card debt were converted to Asset Backed Securities and sold off. On top of these MBS/ABS papers some geniuses constructed an additional financial layer. These were insurance contracts that covered against the default of ABS, MBS and various types of bonds. These insurance contracts, Credit Default Swaps, are totally unregulated private agreements. They were widely created and dealt with when the risk of default of the underlying papers was assumed to be low. Some of the insurers who issued these CDS never had the capital to back all the policies they wrote. In a competitive environment they offered too low premiums to insure against default risks. Some insurers partly insured themselves via reinsurance. When they sold a CDS on a bond issue of some $10 million they went to other insurers and bought themselves CDS, let's say $5 million or perhaps even for $20 million. The re-insurers partly re-insured themselves again by buying CDS elsewhere. Some people simply betted on a change in the default risk of some bonds. They did not even own the MBS or bond in question, but bought or sold insurance against the default of a specific MBS or bond anyway. Some may have bought total insurance from different insurers in a way that a default of the MBS would pay them ten times the nominal value of said MBS. Imagine you could have ten fire insurances on your home that would each pay out the full value of your house if it burns down. That would probably give you some very hot ideas. A $700 billion bailout can not save an unregulated $70 trillion CDS market that is under severe stress." The same holds true not only for the housing market, but also for the banking transactions and the stock market. Lots of transactions are simply based on nothing by assumptions, expectations and hot air. 3:36:36 PM

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