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View Diary: Some Credit Swaps knowledge, Please (51 comments)

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  •  Wow. that is super. (0+ / 0-)

    so you are saying that only a default on the underlying mortgage as a "credit event" triggers the payment?

    I thought that, for instance, in the Lehman Bros case, they were sooooo overleveraged, that their lack of collateral for their overall positions in the market triggered a call for payment on all their CDSs.

    Bookies aren't happy if you are gambling and you are broke...especially if you win.


    •  No -- there is no link between the (0+ / 0-)

      actual mortgages and the credit default swaps.  A credit event is when the issurer of the the security defaults.  If Fannie defaulted on it's bonds, that would be a credit event.  I'm guessing but it looks as if the investment banks were the issuers of the complex, sliced and diced collateralized debt securities - the collateral for those would be the mortgage backed securities (pools of mortgages).  

      This was all a fast moving complex game and there were different products for different purposes and different customers.  The players defined the moves and prices for a perpetual game with a rare default.  The game didn't contemplate multiple potential defaults at the same time.  Lehman may have gotten stuck with CDOs that they couldn't make the payments on and AIG may have been the principal CDS issuerer for those bonds.  But loss situations take a long time to sort out.    

      What FDR giveth; GWB taketh away.

      by Marie on Tue Oct 07, 2008 at 04:14:32 PM PDT

      [ Parent ]

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