Tuesday, March 24, 2009

George Soros gets it (WSJ Op-ed)

Soros at least understands the dangers of "credit default swaps" otherwise known as bond insurance. He is in favor of limiting sale of credit default swaps to holders of the bonds to be insured. He claims that bears drive down the value of company bonds, and hence their credit rating, but taking out credit default swaps against their bonds. As more and more credit default swaps are bought, the price goes up, and the market takes the rise in price as a sign of financial weakness.
The trouble is, buying credit default swaps costs little but can pay off big, where as selling them makes little money but carries humungous risks. The $170 billion bailout to AIG has gone to pay of the credit default swaps that defaulted. $170 billion is enough money to choke a hog.
According to Soros, the big Wall St disasters, Lehman, Bear Stearns, AIG, were caused by bear raids, groups of traders deliberately driving down their stock prices. I don't buy that, I figure the Wall St disasters occurred when investors wised up to the fact that the emperor had no clothes. After making huge loans on real estate that defaulted, the market decided that the dear departed firms were broke.

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