thomast2

Why Wall St. Needed Credit Default Swaps

Yes. As Bill Gross from PIMCO said, the historical default rate is only 1.25%, but I think it is probably more like 3% due to CDOs. Most of them are still good with good counterparties. However, 3% of $65 trillions now is a huge number.

Interesting analogy of Loyds of London. Thanks for your note.

Why Wall St. Needed Credit Default Swaps

Arneson, You are right about bonds. Actually CDS is used for both bonds and CDOs. The CDS on bonds are simpler than CDOs which are very hard to put a value on, let alone assign a value to a derivative (CDS) of the CDO. Even in the GM example, I alluded to CDS used for GM bonds, but the main discussion of my article is focused on CDS on CDOs, where most of the manipulation, distortion and abuse are coming from. Thanks for your comment.

Why Wall St. Needed Credit Default Swaps

Thank you all very much for your feedback. I have never received so much positive feedback on any of my previous posts at SA. Last Dec, I published another article “My 10 predictions for 2008” that was well received but also got some negative comments. More luck than anything else, most of those predictions have already turned out to be true at the 1st quarter of this year so far. Even I am happy about them being correct, I am also deeply worried about the soaring price of current agricultural products, which usually brings unrest, riots and wars in the long human history.

Like Zolio, also as a MBA holder (not from the prestigious Ivy League though), sometimes I am also ashamed of the whole financial industry, especially the investment banking sector. With regulation or without regulation, I don’t see any way to eliminate the moral hazard issue. It always comes back in one form or another (usually not at the form that people would expect) if you look the whole Wall St. history. I guess we just have to live with it, because it is basically human nature, thus “greed”. The best thing about this country is that we still have some press freedom to reveal this kind of manipulation and abuse, which could be a luxury in other countries.

Thanks again to all and Cheers.

Foreclosure Versus Delinquency: Either Way, Financials Will Pay

Thanks both for your comments. I think when seekingalpha moving my article over from my blog site vestopia.com, it made a minor error. What I said was "Foreclosure has already caused bank's recovery rate at 50%". What I meant was due to the increasing foreclosure with fire sale prices, lack of bidders, further deteriorating of real estate market, banks and mortgage companies can roughly recover 50% of their loans. So Zhang Fei, your interpretation is correct.