President Obama has announced he will seek broad new authority to regulate the financial derivatives markets. As has been discussed many times previously here on the blue, the massive unregulated financial derivatives markets (estimated to be in excess of hundreds of trillions of dollars in overall scale) have been one of the major contributing and complicating factors in the current global financial crisis. [more inside]
posted by saulgoodman on May 13, 2009 - 43 comments

Credit Default Swaps (CDS) are derivative instruments providing the purchaser with protection against default on an underlying financial asset. When Fannie Mae and Freddie Mac technically defaulted on September 7th there was much speculation that the CDS market would collapse as a result of protection being invoked on $1.4 trillion dollars worth of debt. On October 6th these derivative contracts settled, and the CDS market didn't collapse with recovery rates of 92% being observed. Today CDS contracts protecting against the default of Lehman Brothers settle. The problem? Because industry lacks a central clearinghouse for these derivatives, nobody is really sure how many CDS contracts were written either by Lehman or by other banks providing protection against a Lehman default. Next on the list are CDS' covering Washington Mutual, which are due to settle October 23rd.

Meanwhile efforts to create a clearing house continue, as some folks speculate that the settlement of Credit Default Swaps is a major reason why banks are hoarding cash.
posted by Mutant on Oct 10, 2008 - 155 comments

How AIG fell apart is a good article giving an overview of Credit Default Swaps (CDSs) and the role they played in AIG's struggle. CDS issues are a crisis that quite a few saw coming just a few months ago and one that was discussed here then, although AIG was thought be a special "safe" case among CDS issuers. Indeed it now seems that AIG's particular problem was that it had failed to hedge the CDSs they issued with CDSs acquired from other institutions, presumably on the premise that they were insuring assets too safe to fail.
posted by clevershark on Sep 19, 2008 - 185 comments