In taking over Fannie Mae (FNM) and Freddie Mac (FRE), Henry M. Paulson Jr. and the U.S. Treasury Dept. cleared up uncertainty surrounding the companies’ common stock, preferred shares, and senior and subordinated debt. But Uncle Sam’s intervention also triggered a default event, according to the International Swaps & Derivatives Assn., and now roughly $1.4 trillion in outstanding credit-default swaps, a type of derivative contract, must be settled.
You remember the credit-default swap (CDS). It began life as an “insurance policy” that big players such as hedge funds took out to hedge investment risks. Over time, however, the CDS became a tool that big funds, financial institutions, and others used as a way to place bets on whether a company would go bankrupt. They’re contracts negotiated between two parties and””unlike insurance policies””there’s no regulator verifying that companies can actually make good on the $62 trillion of swaps outstanding.
The Arthur Andersen fiasco apparently taught too many with too much money only that they need to hide the figures in the spreadsheets a little better and not to be more fiscally responsible.
Okay we have two defendants here. The lending companies that lowered their rates to sub ARM levels to rope in lot’s of no or low down payment buyers that gambled with them and lost! If the government plans to brace shaky lending companies for their stupidity shouldn’t some of these funds be allotted to some of the borrowers that stupidly believed it was good to grab some of that cash? I see a lack of judgement on both groups. Nuff said!!!