PermaLinkBig, Bigger, Biggest.
11:54:15 PM

Until recently, I thought that the boogeyman in the sub-prime mortgate and credit crisis was the collateralized debt obligation. The CDO market, however, is worth a mere $US 2 trillion (i.e., $US 2 million million), and it supported borrowing of an estimated $US 20 trillion.

The gross world product, on the other hand, is a mere $US 54 trillion. That's not all that different, by the way, than the total market cap of all US-based public companies, which was $US 51 trillion -- at least as of a few months ago.

So, CDOs are big, but gross world product and US market cap are both bigger.

But... it turns out that these are but a pittance compared to the boogeyman of the moment. The prize for biggest in this contest goes to the credit default swap. The exact amount is not known because there is no central market for CDSes, but there's apparently something like $US 62 trillion or more of them being traded. This is in a market that didn't exist a dozen years ago, and which few people outside of the inner-sanctum of the financial services industry had ever heard of until a few months ago.

I don't pretend to understand high finance, CDOs, or CDSes, but part of the problem seems to be that very few people do understand them. And it seems fundamentally wrong that something so poorly understood should be accounting for value that exceeds the world's entire economic output for a year.

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Comments :v

1. Axel09/18/2008 07:49:32 AM

I like your last sentence. To a certain extend this must be understandable for each of us. Personally am going to start reading books about it.
In the current situation its as pointless to declare the end of market economies as to state that those smart guys with Masarati, Gucci and stuff will certainly solve the "issue" for us.
Something certainly has gone wrong in a terrible way, that has to be fixed.

2. Andy Broyles09/18/2008 10:04:36 AM

I work in the P&C insurance industry and my limited knowledge of the credit default swap seems to me to be very much like reinsurance that insurance carriers have to buy to limit their risks; but these things are not regulated like the reinsurance industry!

It simply amazes me how the insurance industry works, it is very much like a multi-level marketing scheme where the folks at the top of the pyramid get incredibly wealthy (because they set the ultimate terms) and the guys at the bottom assume the worst risk/payoff ratio and have a hard time making it work in their favor.

In this case, it seems like an Enron like ponzy scheme to hid the real losses (defaults) by having these off the books 'realationships' in place to quickly and quietly move the loss around under the guise of a loss hedging manuever.


And, knowning your polictical favorings, I must add that it truly saddens me to think that my party, the Republicans, were touting the home ownership rate as a positive a few years ago at the same time that all of this debt loading was occuring and undermining the financial stablity of the world (and this is not just a US problem by far...)

3. Craig Wiseman09/18/2008 10:42:28 AM
Homepage: http://www.Wiseman.La/cpw

You're right. The financial market are a scary place right now. This is the odd thing here is that neither party gets regulation right: Gov't regulations should exist for two primary reasons: To allow a fair playing field upon which all the plays compete (full disclosure, etc) and to mitigate systemic risks that individual players won't be influenced by (environment, market collapses, etc).

This crisis shows what happens when we have neither. The problem we have is that one party typically wants to over-regulate and tell the markets how to behave (the CRA, etc. was one of the big things that helped start us on the path to high-risk mortgages), and the other wants NO regulation.

So we end up with what we have today: Regulation started us down the path by showing how profitable high-risk mortgages could be (in good times), and then regulation & enforcement was removed. And then the good times ended.

4. Axel09/18/2008 12:08:07 PM

All those non-us organizations that bought the faulty stuff have done so out of voluntary greed.
Its a global banker problem.
If those people are capable of creating a system with easy access to cheap credit for trustworthy people, they deserve any cent of their huge income.
Currently one gets the impression, they simply can't.

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