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March 08, 2010



Wow. That post was way long. And I have to read multiple articles linked as well. It will take me a while to digest it so I can comment. But I like the subject.


Okay, what I glean from it so far is you are defending the swaps because they resulted in interest rate savings. Which is good. But at what price to get those?

Remember people in a pyramid scheme are also overjoyed at first with their assets skyrocketing in value on paper in their statements. Until they try to cash those assets in. So yes, I think it's a good possiblity those valuations are phony.


FWIW, Market Ticker had post up last week about AIG selling CDS to Greece.

Thomas Collins

I am going to hazard a guess that these contracts paled in comparison with Greece's straight debt. Blaming derivatives arrangements for Greece's woes is another way for progs to avoid facing the reality that they are running out of other people's money to spend.

By the way, the bummer on hedge contact termination payments is not that the governmental body has to pay when it wants to get out of a swap, but that these contracts are typically written so that even if the termination event is the bankruptcy of the private counterpary (such as Lehman Brothers), the governmental party still may owe a termination payment. Nonetheless, these contacts pale in comparison with others sources of governmental liability woe, such as unfunded pension liabilities.

Thomas Collins

The Cato Institute has a lot of interesting materials on proposals to regulate derivatives and other regulatory proposals in response to the financial bubble. See LUN for examples.

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