eco paper - Rodion Lerman: Effects (A), Risks (B), and...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Rodion Lerman: Effects (A), Risks (B), and Criticisms (C) of Credit Default Swaps A. Credit Default Swap (CDS) effects are far reaching simply because an original CDS can through as much as 20 trades (Economist). Subsequently, the CDS market is huge – $42.6 trillion huge; this sheer size means that any credit risk failings have the potential to dwarf the sub-prime crisis in comparison and dramatically effect all markets. Andrea Pincus, at partner at Reed Smith LLP, described CDSs as have a “ripple or domino effects.” This compounded with the subprime debacle, unemployment, and energy costs gives the CDS market a chance to have a profound impact on our Macro-economy. Economists have called it the “perfect storm” and some have worried about another Great Depression, but most agree that safeguards are in place to alleviate that risk. Failings in the CDS market lead lenders to become more cautious, potentially leaving mortgage and capital seekers in the dust. Investment is a major component of Gross Domestic Product (GDP) and when capital is in short supply, investment suffers. However, when the economy booms, CDS can bring enormous wealth to our economy as the market flourishes. This might explain why the notional value of CDS exploded from virtually nothing a decade ago to $62 trillion at the end of 2007. CDS’s were traded privately and secretly by banks and at first they supported the notion that new, large markets could function with little regulation. Nonetheless, in our current recession, a vast amount of blame has shifted to CDS. Eric Dinallo,
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
the insurance superintendent for New York State called them “catastrophic enablers for the dark forces that have swept through financial markets.” (Economist) B. The speculative nature of CDS’s, combined with their heavy volume, secrecy, and lack of
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/06/2009 for the course PSY 3042 taught by Professor Engle-friedman during the Spring '05 term at CUNY Baruch.

Page1 / 5

eco paper - Rodion Lerman: Effects (A), Risks (B), and...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online