- Jun 6, 2007
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America's political and economic leaders did not fully learn the lessons from the Great Recession! Arguably the worst element of the Great Recession was the seizure of America's credit markets, the short and medium term lending mechanisms of the American economy stopped functioning and if it wasn't for the Federal Reserve Bank stepping in with all kinds of support the country would have fallen into a depression. A major cause of this credit market seizure was financial institution sellers of swap contracts could not absorb the losses when the mortgages underlying these swap contracts began defaulting at high rates. A swap contract is like an insurance contract where for the credit default swap contracts that were at the center of the 2007-2009 recession the contract sellers obligated themselves to pay the contract holders if mortgages and in many cases subprime mortgage back securities defaulted at high rates. As the American people saw when these underlying subrime mortages began defaulting at high rates major American financial institutions that sold these swap contracts were toppled or had to be rescued by the Federal government - storied banks like Bear Sterns and Lehman Brothers were wiped out and America's largest Insurance company, AIG, needed a $150 plus billion dollar bail out.
One would have thought that America's political and economic leaders would have learned the simple lesson, that financial institutions should not be permitted to sell credit default swap contracts to a buyer unless the buyer owns the loan or bond that is the subject matter of the swap contract, no speculative credit default swap contracts allowed in America. During the great recession these financial institutions that got in trouble had sold multiple swap contracts on the same bonds, in fact what went on was that speculators that didn't even own the underlying bonds but had the foresight to see that the mortgage borrowers would not be able to meet their loan obligations bought swap contracts in mass and when the defaults started these sellers couldn't handle the financial liability. Responsibility cries out for banning these credit-default derivitives.
Today, the danger is not in credit default swap contracts on mortgage bank secuities but on bonds and loans of businesses that are in financial trouble. Yesterday, the Wall Street Journal reported that there is $23.5 billion of swap contracts outstanding for Radio Shack Corporation's outstanding $1.4 billion in outstanding debt; JC Penney has $19.3 billion outstanding swap contracts on $8.5 billion of outstanding debt and Caesars Entertainment has $26.9 billion of oustanding swap contracts on $8.5 billion of oustanding debt. Why is this casino capitalism behavior being permitted in America today are we a brain dead people. In the latter two cases the sellers of the swap contracts most likely won't have to pay out and even for the Radio Shack swaps a $23.5 billion payout won't destablilize America's financial industry. But if this behavior is allowed it certainly will result in a destabilzation, consider all the internet companies out there even companies like Amazon that spend more money than they take in what happens when America runs into a major recession it will happen economy's are cyclical, economists will tell you that is essenitially a fact. When this day comes and the tide turns on the credit default market at minimum America will see many of these sellers of such swap contracts such as hedge funds and private equity funds hurt real bad and in many cases pension funds investing with these entities will be hurt real bad, these financial institutions will conduct fire sales on other assets and cut expenses at these businesses resulting in a lot of main street Americans being hurt. Members of Congress especially Republicans need to get a conscience on this issue and stop this foolish speculation in our economy. They should be asking themselves does this speculation raise capital for a business does it create a new product or service it is clearly irresponsible capitalism.
Do Washington politicians really think the American people want this swap contract system we have in place today where mischief abounds related to these contract. The WSJ reported that sellers of these swap contracts sometimes go make loans to the underlying businesses that are the subject matter of the contracts just to carry the company during the time of the contract so it won't default during this period and then the company goes bankrupt which obstructs good business evaluation to try to save the business or part of the business. Sometimes buyers of these swap contracts pursuant to the WSJ buy up stock in a troubled company that is the subject matter of a swap contract and work to cause the company to default on their bonds. The American people don't want this garbage, they expect their elected representatives in Washington to put a stop to this nonsense!
One would have thought that America's political and economic leaders would have learned the simple lesson, that financial institutions should not be permitted to sell credit default swap contracts to a buyer unless the buyer owns the loan or bond that is the subject matter of the swap contract, no speculative credit default swap contracts allowed in America. During the great recession these financial institutions that got in trouble had sold multiple swap contracts on the same bonds, in fact what went on was that speculators that didn't even own the underlying bonds but had the foresight to see that the mortgage borrowers would not be able to meet their loan obligations bought swap contracts in mass and when the defaults started these sellers couldn't handle the financial liability. Responsibility cries out for banning these credit-default derivitives.
Today, the danger is not in credit default swap contracts on mortgage bank secuities but on bonds and loans of businesses that are in financial trouble. Yesterday, the Wall Street Journal reported that there is $23.5 billion of swap contracts outstanding for Radio Shack Corporation's outstanding $1.4 billion in outstanding debt; JC Penney has $19.3 billion outstanding swap contracts on $8.5 billion of outstanding debt and Caesars Entertainment has $26.9 billion of oustanding swap contracts on $8.5 billion of oustanding debt. Why is this casino capitalism behavior being permitted in America today are we a brain dead people. In the latter two cases the sellers of the swap contracts most likely won't have to pay out and even for the Radio Shack swaps a $23.5 billion payout won't destablilize America's financial industry. But if this behavior is allowed it certainly will result in a destabilzation, consider all the internet companies out there even companies like Amazon that spend more money than they take in what happens when America runs into a major recession it will happen economy's are cyclical, economists will tell you that is essenitially a fact. When this day comes and the tide turns on the credit default market at minimum America will see many of these sellers of such swap contracts such as hedge funds and private equity funds hurt real bad and in many cases pension funds investing with these entities will be hurt real bad, these financial institutions will conduct fire sales on other assets and cut expenses at these businesses resulting in a lot of main street Americans being hurt. Members of Congress especially Republicans need to get a conscience on this issue and stop this foolish speculation in our economy. They should be asking themselves does this speculation raise capital for a business does it create a new product or service it is clearly irresponsible capitalism.
Do Washington politicians really think the American people want this swap contract system we have in place today where mischief abounds related to these contract. The WSJ reported that sellers of these swap contracts sometimes go make loans to the underlying businesses that are the subject matter of the contracts just to carry the company during the time of the contract so it won't default during this period and then the company goes bankrupt which obstructs good business evaluation to try to save the business or part of the business. Sometimes buyers of these swap contracts pursuant to the WSJ buy up stock in a troubled company that is the subject matter of a swap contract and work to cause the company to default on their bonds. The American people don't want this garbage, they expect their elected representatives in Washington to put a stop to this nonsense!
