taskboy3000 (taskboy3000) wrote,

Freddie got fingered (wrongly)

This is an abbreviated post of rage directed at those who wish to pin the financial panic of 2008 on Freddie and Fannie. Whether F&F made poor quality loans (they did) did not directly cause the implosion that consumed Mighty Lehman Brothers, Merrill Lynch, Washington Mutual and many, many others. That distinction goes to the massive scheme of entangling, unregulated debt insurance known as credit default swaps (CDS).

Credit default swaps are insurance contracts that cover the cost of loan defaults. The trick here is that anyone can buy a CDS on liabilities they do not own. Hence, CDS became the gamble of choice on Wall Street through the 2000s. And baby, the CDS business was a-boomin' until 2008.

Because CDS are private contracts between two parties, we will never know the size of that market, but it has been estimated to be in the trillions.

AIG provided many, many CDS, which is why, when the house of cards that began with Lehman fell, AIG got hit very hard. And at the end of 2008, it looked like the Street would have to pay out those trillion dollars worth of insurance.

Does TARP make sense to you all now?

Break up F&F if you must, but that will in no way prevent another crisis of 2008 from happening. Regulating the invisible CDS market will.

This issue isn't that complex. I'm tired of politicians getting this wrong, even if the error is intentionally malicious.

Tags: politics "panic of 2008"
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