Happy H

Berlin Gallery

FROM: THE NEW YORKER

On the other hand, this week, the New York Federal Reserve began to convene meetings to try to create transparency and liquidity in the global market for credit default swaps. These are essentially unregulated insurance contracts sold privately to financial institutions to protect them against losses in stocks or bonds. No government agency regulates credit default swaps. There is no official information available about the size of the market or the distribution of liabilities within it.

Maybe most of these contracts are sound, or balanced out in ways that don’t create huge systemic liabilities--let’s hope so. Published estimates of the nominal value of all credit-default-swap contracts in the world today are in the range of $55 trillion to $60 trillion. So here is a global private market whose products, combined, have a nominal value roughly equal to the total size of the world economy’s output in a year, and apparently no one in any government knows the full market’s shape, distribution, or true vulnerabilities. Gulp.

Posted by Steve Coll
In
Think Tank

Report Card

Spiegel Finance

INTERVIEW WITH GERMAN FINANCE MINISTER PEER STEINBRÜCK

SPIEGEL: And is the United States completely to blame?

Steinbrück: The source and focus of the problems are clearly in the United States. There are many causes. After 9/11, a great deal of cheap money was tossed into the market. Apparently some of that money went to people with poor creditworthiness. This led to the growth of the real estate bubble. The banks embarked on a race over profit margins. Then speculation spun completely out of control…
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SPIEGEL: What, specifically, will you call for?

Steinbrück: A few agreements were already reached with the British and Americans within the G-7 in April. They include imposing new rules on the conduct of the rating agencies, tightening equity regulations and gaining a better handle on cross-border bank supervision. But as far I am concerned, it isn't enough for the industry to develop its own code of conduct. I also want to see the banks no longer allowed to sell all of their risks as they see fit. I think it as a dangerous systemic design flaw that not only loans, but also credit risk is 100-percent marketable. This can lead to uncontrollable wildfires, as we are now seeing...

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