Bear Stearns

I'm actually surprised you have not blamed this crisis on Obama.

 

I knew you would find a way. Congratulations! :laugh: :laugh:

 

No not at all, I still plan on voting for Obama if he wins the nomination, just like I did in the primaries.

 

Well, if the choice is between a guy who hates white people and a guy who thinks we should fight in Iraq for 50 or 100 years, I can put up with 4 years of hate.

 

This is the Economics and Money forum. Let's stay on topic.

A derivative is a contract based on an underlying asset that "derives" its value (hence the name) from a speculated future value. Futures are one example (and there are many kinds of these that are traded, especially on the Chicago Mercantile). Futures work this way: they are contracts where parties agree today to buy/sell an asset at a future date. Let's say you want to buy Christmas lights in six months because you believe (1) The price will be lower in six months and (2, implied) that you can resell them in 9 months for a profit. You enter into a binding contract to buy these, regardless of what the value is in six months (or 9, for that matter). If the lights are more expensive in 6 months (Or again, 9 months), then you got a great deal and your value went up. But if for some reason the price begins to drop, or you see no one is going to buy your lights in 9 months, the value of what you bought has dropped. So the value of your future has dropped. You own something worth very little. Does this make sense?

Credit derivatives that may have played into the demise of Bear Sterns were likely futures and/or CMOs (collateralized Mortgage obligations) based on subprime mortgage backed securities, which are bundles of subprime mortgages or conforming & nonconforming mortgages. Futures would've likely been longer termed futures that scared the holders because the market was perceived to be deteriorating much more rapidly than thought (even though this subprime over-exposure has been forecast for years). Basically, these mortgages were packed into bundles, much the way mutual funds or ETFs are, and sold on the market/secondary market to investors. High grade paper tends to be higher grade investments, such as low yielding Fannie/Freddie bonds that most people have in their 401(k) or IRA bond funds (Lower yielding because they are safer investments with lower interest rates than nonconforming mortgages). These in question were riskier, yet potentially very rewarding investments.

It should be noted that these credit derivatives are just one offered explanation of what went wrong at Bear Sterns.

 

The fifth largest investment bank loses 95% of its value in 2 days. The next day another bank has a deal in place to buy it and the taxpayers will get stuck with any loss. Sound suspicious?