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View Diary: Phantom Insurance: 6x more than the Property Insured! (18 comments)

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  •  So prevent the mortgages from going into default (3+ / 0-)

    and these CDSs never need to get paid.  They have termination dates, usually five years after being written, after which the "insurance" expires.  Prop up the cash flows from the mortgages that flow to the CMOs (collateralized mortgage obligations) or the CDOs (collateralized debt obligations) on which the CDSs were written as insurance until the CDSs expire and the main problem goes away.  

    One litle glitch with this solution (which is a form of "bottom-up" assistance) is that the financial institutions have counted the value of the CDSs in their balance sheets.  If the bailout were to support the mortgages, these values would drop to near zero since the risk of default would be near zero.  This will cause a lot of institutions to lose a lot of paper value and the Treasury Secretary's buddies will be mad.

    Wait, why is this a bad thing...

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