Jan VanDenBerg_

Fannie and Freddie Did Not Cause This Crisis

Excuse the typo in my post above -- the CDS market is $45 TRILLION to $62 TRILLION.

Fannie and Freddie Did Not Cause This Crisis

Lord Darley, above, is the only comment in this entire thread which is correct.

The decline in home values would not have touched off this global financial crisis if unbacked Credit Default Swaps had not been accepted by regulators as sufficient to upgrade the credit rating of banks' housing-backed assets. This is what allowed the huge increase in outstanding credits/debts. This is what allowed the entire chain of agency problems outlined above to occur.

The CDS market is reportedly $45 to $62. Compare that to a total US mortgage outstanding of $10 trn traditional and $10 trn non-traditional. There is clearly something wrong here.

All of Japan's prodigous savings are only $14trn. And these baseless CDSs are $62?

These CDSs are merely a type of braggard's bet, an unbacked, reserve-free, unregulated gamble. But regulators apparently accepted the mere purchase of this bit of frippery sufficient to allow the upgrade of a risky asset -- requiring a reserve of, say, 8% -- to a safe asset -- requiring a reserve of, say, only 0.59%.

This was clearly regulatory failure.

This failure occured globally. European banks bought these things and used them to reduce their reserves and increase their lending also.

Since these CDSs cheaply enabled the "improvement" of asset grade, they allowed massive increases in credit by reducing the required reserves banks and non-banks were required to hold.

These massive increases in available credit were going to go somewhere and they just happened to flow to sub-prime housing.

Before that, it was tech stocks, remember? VC, remember?

It's as though 5 guys, each with a buck to his name, play poker all night and run up huge gains and losses -- some lose thousands of dollars and some win as much -- but when any one of them stands up and says he's cashing in his chips to go home, all hell breaks lose -- because none of the losers can pay what they owe and none of the winners can collect.

This is what happens when the banker hands out chips for free.


Jan VanDenBerg