Bear Stearns

Discussion in 'Money Talk$' started by Ps104_33, Mar 23, 2008.

  1. Ps104_33

    Ps104_33
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    In a recent NYT article "What Created This Monster?".........

    http://www.nytimes.com/2008/03/23/b...58ac06e9bfd431&ei=5088&partner=rssnyt&emc=rss



    ......the recent Bear Stearns debacle was blamed on "credit derivatives' tied in with the sub-prime mortgage market. So I looked up "credit derivatives" on Wikipedia.
    Does anyone understand this stuff:

    In finance, a credit derivative is a "financial instrument or derivative whose price and value derives from the creditworthiness of the obligations of a third party, which is isolated and traded."[1] Credit default products are the most commonly traded credit derivative product[2] and include unfunded products such as credit default swaps and funded products such as synthetic collateralized debt obligations (synthetic CDOs)(see further discussion below).
    Credit derivatives in their simplest form are bilateral contracts between a buyer and seller under which the seller sells protection against certain pre-agreed events occurring in relation to a third party (usually a corporate or sovereign) known as a reference entity.[3] These events are called credit events and they relate to the creditworthiness of the reference entity. The reference entity will not (except in certain very limited circumstances) be a party to the credit derivatives contract, and will usually be unaware of the contract's existence.
     
  2. dragonfly

    dragonfly
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    I'm actually surprised you have not blamed this crisis on Obama.
     
  3. Ps104_33

    Ps104_33
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    With his ties to Rezko he could very well have contributed to the problem.
    Actually if deregulation of the industry is to blame then you could blame Bill Clinton for signing into law the Commodity Futures Modernization Act, which kept much of the market for derivatives and other exotic instruments off-limits to agencies that regulate more conventional assets like stocks, bonds and futures contracts.
     
  4. dragonfly

    dragonfly
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    I knew you would find a way. Congratulations! :laugh: :laugh:
     
  5. Ps104_33

    Ps104_33
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    I hope I didnt shatter your infatuation.
     
  6. dragonfly

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

    billwald
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    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.
     
  8. TomVols

    TomVols
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    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.
     
  9. billwald

    billwald
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    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?
     

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