8. Credit Default Swap Blues

03:09
Michael Dyer

Story

I had just been put on forced furlough and the idea of doing an economic-based blues song came to me. For those unfamiliar with some of the terms in this song, here is an explanation: There are two types of credit default swaps: 1. The buyer owns a security and purchases insurance to protect against default. This sounds strange: If the security might default, just sell it rather than bet against yourself. Explanation: Banks used credit default swaps to evade requirements that they must hold some capital as a type of collateral against their loans and investments. Regulators accepted swaps to show there was no risk of default, thus no need for this protective capital. 2. In "naked" or "synthetic" credit default swaps the insurance buyer does not own the security being insured. This is pure gambling.

In the 19th century, bucket shops gambled on stocks they didn't own. Bucket shops were blamed for the Panic of 1907 and the states outlawed them. These swaps were re-legalized with The Commodity Futures Modernization Act of 2000, when Congress and a lame-duck Pres. Clinton immunized credit default swaps from being regulated by the states.

The investment banking firm of Goldman Sachs convinced a huge insurance company, AIG (American Group International, Inc.) to sell many credit default swaps (without capital to cover them in case of defaults). When these swaps became toxic (resulting in enormous liabilities/losses) AIG was saved from bankruptcy by a huge influx of taxpayers' money by the US Government.

Two rating firms, Moody and Standard & Poor (S & P), took many subprime home mortgages (i.e., homeowners with very poor credit ratings and thus high risk of defaulting on their loans), aggregated many of them together, re-rated them AAA quality and then sold them around the world to unsuspecting investors. After Goldman Sachs itself was bailed out by taxpayer money, they gave themselves billions of dollars in bonuses. Alan Greenspan, who was chair of the US Federal Reserve for 18 years, in Oct. 2008 admitted to Congress that it was a mistake to not have regulated default swaps and other forms of derivatives.

Finally, the housing bubble itself was caused by the US Government's policy of making extremely low interest rates available for purchasing homes. Canada, for example, did not have a housing bubble because its government did not follow the same monetary policy. The Securities and Exchanges Commission (SEC) is a US government-created agency that is supposed to protect investors from fraud but failed to do so. All of the above resulted in the global Financial Crisis of 2008/9.

In 2010, many states/cities were still on the verge of bankruptcy; hundreds of thousands had lost their homes; unemployment over 12% in many areas and thousands of state teachers and other state employees have been laid off or given forced furloughs. The "new president" refers to Pres. Obama, who went along with the previous plan of Pres. Bush to bail out financial firms with taxpayers' money.

In Dec-2009 China held about $900billion of US government debt. The USA national debt in 2010 is equal to over $30,000 owed by every U.S. man, woman, and child. Leverage is just a word to make being-in-debt sound sexy (rather than risky). A derivative is a financial instrument whose value is derived from other financial instruments; so a credit default swap is a type of derivative. A Quant is a quantitative analyst -- usually someone with a math, statistics or physics degree whose job is one of creating mathematically complex financial derivatives.

Lyrics

CREDIT DEFAULT SWAP BLUES
Michael Dyer
© 2010

Those investment bankers paid the rating firms to say,
that Subprime mortgage 'vestments were the truth, the path, the way,
To protect our savings, for a rainy day.

But they lied to us, diced and fried us, With the worst storm in decades.

Now I'm on forced furlough, while my neighbors lose their homes,
But S.E.C. good fellas ride limos made of chrome.

Congress had decreed, let hogs like AIG,
Take premiums, unilateral, Insure swaps, without collateral.

Oh, where were bucket-shop cops, To make the madness stop?

It's so appalling. No new regulations, Just some name calling.

Goldman Sachs acts smug, with billions in bonuses,
While pullin' out the rug, Our taxes to be spent, Says our new president.

I'm Moody on S & P. They should all be in jail, ya see.
Without any chance for bail.

And now the same crooks are paid, to clean up this mess,
While my state, town and county, In severe layoff distress.

China holds all our debt. They'll own our country soon, I bet.

It's appallin' just how far we've fallen.

I'm so blue and bummed out, and pissed off as well.
I'd vote 'em back to where they came from, Back to flamin' hell!

It's so appallin', just how far we've fallen.

I got the blues,

The quant-leveraged, toxic asset, aggravated-aggregated,
Greenspan scam, derivative doo-wap,

Credit default swap blues.

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