Democratic Underground - CDSs caused demand for high risk tranches to explode. CDSs were supposed to insure against loss if

Reply #3: CDSs caused demand for high risk tranches to explode. CDSs were supposed to insure against loss if [View All]

JohnWxy

(1000+ posts) Send PM | Profile | Ignore

Sat Apr-10-10 03:19 PM
Response to Original message

3. CDSs caused demand for high risk tranches to explode. CDSs were supposed to insure against loss if

CDO defaulted. Thus institutional investors who by charter are not allowed to invest in high-risk securities felt they could invest in high risk CDOs becsause the CDSs eliminated the risk of loss of your investment. At least that's how it was supposed to go. Of course, if the entity selling the CDS (AIG) didn't think to hold enough in reserve to cover payment of 'called' CDSs then the house of cards fell flat .. and so too the economy.

Deregulation Delusions. Thanks to the Commodities futures Modernization act, slipped in as a rider to the Omnibus funding bill (11,000 pages) in the last days of the Clinton administration by Phil Gramm, Credit Default Swaps were by law unregulated, not even monitored.

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=114&topic_id=46775">more on CFMA

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Reply #3: CDSs caused demand for high risk tranches to explode. CDSs were supposed to insure against loss if [View All]