America Don't be Blue, They'll Dump Your Credit Default Swaps for You

From the DC Underground:
Washington Post article 10/21/08 on credit default swaps (CDSs) sheds some light on these assets and why they are not like insurance:

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/20/AR2008102003110_pf.html

1. "...Meanwhile, the New York Fed has been meeting with private companies to set up a private clearinghouse for swap trades that could be in operation by the end of the year.

The clearinghouse, for a fee, would act as an intermediary that would guarantee transactions between swaps traders. In order to make those guarantees, the clearinghouse would require traders to maintain a sufficient amount of capital in their accounts. That would make it difficult to trade swaps without having the resources to cover a contract should a default happen."

2. then we had the pathological gamblers stepping in :

"Originally, swaps acted like insurance policies for bond investors in case a company collapsed and could not pay back buyers of its bonds. To protect themselves against such defaults, bond investors could agree to pay a periodic fee to have another party cover the losses.

Unlike stocks and bonds, credit-default swaps fell outside the government's purview largely because they are private contracts. A law backed by leading Republicans and passed by Congress in 2000 specifically exempted swaps from oversight by the SEC and CFTC, which oversees commodity trading. What else is new... McCain probably voted for it but also Clinton probably approved it.

Since then, big hedge funds and other traders discovered that swaps could be traded and used to speculate on how close a company was to collapse. The market mushroomed. Its total value outgrew that of all publicly traded stocks combined. The swaps market began to affect the financial system in once unimagined ways."

Guess AIG was printing CDSs like little pieces of paper that they collecting a sucker fee for but didn't needed have enough or any assets to cover the CDSs in the event that the bubble burst so now Uncle SAP has to step up for $86 billion but rumor has they are now asking for $ 123 billion. With the CDS market at $55 trillion, AIG must have been printing CDS contracts like monopoly money. Can you even talk about leverage .... it was fraud and a Ponzi scheme where AIG was not able to get out of town fast enough.