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How Complex Securities, Wall Street Protectionism and Myopic Regulation Caused a Near-Meltdown of the U.S. Banking System
There’s no time to beat around the bush. Let’s flush out the three credit-crisis catalysts that have remained hidden for too long, thanks to Wall Street protectionism and myopic regulation. Those catalysts – which brought us to the brink of a financial meltdown – are structured collateralized debt obligations, credit default swaps, and the horrific offspring of the two – credit default swaps on structured collateralized debt obligations.
An asset-backed security (ABS) is a type of tradable debt security that’s derived from a pool of underlying assets. We could be talking about a pool of mortgages, of automobile leases, or loans…
24Sep2008 | Money Morning | Comments Off | ContinuedThe Inside Story of the Collapse of AIG
There’s nothing fundamentally wrong with the core insurance business units of American International Group Inc. (AIG). Nothing at all. What imploded the venerable insurance giant was an accumulation of misplaced bets on credit default swaps.
By the best estimates of the International Swaps and Derivatives Association and the Bank for International Settlements (BIS), often referred to as the central banks central bank, the notional value of credit default swaps is some $62 trillion, or 35 trillion British Pounds at an exchange rate of $1.78.
A credit default swap (CDS) is akin to an insurance policy. It’s a financial derivative that a debt…
23Sep2008 | Money Morning | Comments Off | ContinuedInvesting in CDs: 2 “Safe Harbor” Investments Right Now
I walked into the University Place Branch of Bank of America on Saturday morning and was eyewitness to a shocking run on the bank. An unruly crowd had taken over the lobby of the branch. Every station in the normally deserted suburban banking center was full of customers.
Then I noticed a sign in the window. “Branch hours are extended today to accommodate all the customers wishing to open a High Yield 4% Certificate of Deposit.”
These customers weren’t demanding to withdraw their money; instead, they were rushing to make deposits. Bank of America was experiencing a reverse run as investors hurried…
1Aug2008 | Investment U | Comments Off | Continued
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