الخميس، مايو 07، 2009

Toxic Assets

TOXIC ASSETS







In all of the US government measures to face the economic crisis, I have not seen an action taken against what seems to be the main reason standing behind the global meltdown; the Credit Default Swaps (CDS). Why haven't the US government or the Fed issued new regulations which would either remove or greatly diminish the size of the CDS market?

In my view, the CDS is a highly toxic instrument which was largely responsible for the global meltdown. The size of CDS market is 60+ trillion dollars while US total GDP is some 13 trillion dollars (20% of the CDS market). This means that any small drop in real-estate prices can result in huge losses in the CDS which largely back mortgages (toxic assets rising), a blow which the United States economy can not withstand or easily absorb because of the huge size of the CDS market. It is just too much exposure with unnecessarily enormous degree of risk. It is like someone who makes $100K a year yet goes to Vegas and gambles with $500K ! Huge leverage which is good if one wins, but is catastrophic when one eventually loses.

Perhaps CDS should only be traded on regulated exchanges directly involving the bond owners themselves as Soros had suggested? I am afraid that the US government is pumping money to only treat symptoms while the roots of the problem remain untackled.


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