ge capital mortgage insurance

ge capital mortgage insurance
Imagine a world in which public institutions do not lend money to consumers, businesses or any other. Make government bonds downgraded from AAA to B-. Imagine that the dollar will lose another 20% of the relative value, and the unemployment rate tripled in 3 months. Before the U.S. government is intensifying with a $ 700B plan to stabilize our financial inadequacy and injected hundreds of billions more liquidity into the world of central banks, we were, in fact, staring into the abyss, the end of the financial world as we know it was near-to-hand.

Conventional wisdom bodies responsible for the credit crisis to the impact of falling real estate prices on sub-prime, residential mortgage. It is said that banks and brokers, the bad loans and when the market for single family homes plunged, too many of these loans in default to leave, said banks and brokers, of the bag. Said bag was then immediately to Uncle Sam. And although it is true that the subprime loans in a weakening housing market, the emergence of the problem, they are not the problem per-say. Stupid loans originated by lenders, greedy for profit, and by the borrowers, greedy for nicer houses and massive capital appreciation and encouraged by the politicians, eager for the vote of the components with low FICO scores, were only the spark that with the world on fire.

There are fifty-one million residential mortgages in the U.S. today. One percent of them are "subprime", "(less than 20%) and a portion of subprime mortgage (less than 30%) are in default. So the question is how this has a relatively small segment of such a large (multi-trillion-dollar) market, such a disproportionate and devastating financial carnage? You would think that the damage would only be for the lenders, not to diversify its mortgage portfolio and could homeowner who does not pay their mortgages. Instead we are witnessing global economic chaos on an unprecedented scale. How did this? The perpetrator is not a small sub-prime mortgages, which we all love to hate so much, it's an obscure official category of securities that depend on that the mortgage market which gives them their intrinsic value. They are known as "credit derivatives". Not themselves credit, derivatives are securities "from" "from loans, the loans and completely worthless, except for these loans. In the last decade, credit derivatives have played a minor role in the functioning of credit markets, today they are a danger to the primary economic system of the capitalist world. And the most famous of all derivatives is the shadows, unregulated "credit default swap".

A credit default swap (CDS) is a contract, as an insurance against the event of failure of a claim. A debt holder, as a commercial bank, which holds a pool of mortgages, would buy protection against the possibility of failure by a CDS dealer. If the covered bond is in default, the dealer would be obligated to the holder the face, that the level of specific binding. AIG was a major CDS dealers, like Lehman Brothers, Bear Stearns, Goldman Sachs, Morgan Stanley, German Bank, JP Morgan Chase and Merrill Lynch to name a few. All the big financial companies are taking advantage and all the major financial institutions to provide them. A CDS market is not a necessary part of a credit market, bonds can be used with or without them, but none the less, they were omnipresent. Bond holders were eager to risk it on some third party, and thus free up capital for lending, and brokers, banks and insurance companies were happy to reduce the risk of a beautiful fairy.

It did not take long for speculators to find out there were no rules when it came to the CDS market. Who might buy or sell a CDS against any bond, whether they are in possession of the bond or not, each agent could be a CDS contract, even if they do not have the commitment of the owners. Dealers started selling CDS contracts for mortgage-backed bonds that they had no connection to, and investors buy protection against the failure of other people's debts. By the end of 2007 $ 62 trillion in debt through CDS paper, and since the CDS market is a closed, bilateral market (a private transaction without clearing platform or exchanges) No one can really know the true extent of an enterprise risk exposure. To questions much, much worse, CDS traders began to purchase CDS contracts which they themselves had. So that the agent, allegedly to protect the banks, buying protection from other brokers, insurers and other banks. The result was a complex and intricate network of interconnected documents without the risk that the UBS in Switzerland, the German bank in Germany, Goldman Sachs in the U.S., sovereign wealth funds in the east and middle east. Mutual funds, hedge funds, pension funds, banks, lenders, brokers, insurance companies, financial departments of international corporations (such as GE Capital) and any other company in the credit markets were and are very committed.

Now, armed with a better understanding of the extent of the problems, consider what would happen if a large issuer of the CDS contracts, or two, went bust. Take AIG, for example, if AIG had been allowed to fail, all of their CDs would have become instantly worthless, all their banking and brokerage clients of companies around the globe would be, once again on the hook for all the ones they had at AIG . On the day AIG into bankruptcy, thousands of institutions would be insolvent and would have more CDS contracts with a few billion dollars or you can file for bankruptcy.

Here's subprime mortgages and falling home prices are a factor. Trillions of dollars of mortgage-backed bonds have a sub-prime component. (A-component, mind you, not a full blown direct exposure) Due to the crisis in subprime, which annoyed by the popping of the real estate bubble, the secondary market in mortgage bonds evaporated. Nobody wants them, they have become illiquid. Because they are illiquid, it is almost impossible to accurately assess their value or their relative risk. This means that buying a CDS to protect them is restrictively expensive.

Should one or more of the major CDS players fails, it is highly unlikely that these contracts, they can be replaced quickly. Thousands of debt-holders would drive the market and prices for new CDs and go to the value of existing CDS contracts. CDS contracts are in the books at market value so that the banks do not need to buy new CDS would capital as the value of their existing contracts fell. This would result in cascading failures of banks, brokers and insurance companies throughout the world. Only the complete global financial crisis would be.

In the coming months, regulators approved and monitored a clearing house for CDS contracts, presumably by Chicago based Clearing Corporation. Once there is a regulated exchange and clearing platform, all CDs treaties on trade, increase transparency and quantitative restrictions, the dealer. Not a single dealer is always the possibility too dominant and thus "too-big-to fail". "

The risks associated with a massive unregulated market for credit derivatives will eventually be alleviated. In the mean time, the system must be stabilized, regardless of the perceived costs. The alternative is almost unthinkable, $ 700B will seam like a sack of clams only in comparison to what complete economic collapse would cost us.

Master Capital LLC - Commercial Mortgage Loans - privately funded - Equity Financing - Asset Management - Simple, 1 Page Commercial Mortgage Application Online - Fast Answers - Close in 14 days - Glenn Fydenkevez is president of the Capital Master Plan, he has more than 20 years experience in the financial industry and is an officer in one of the world's largest investment banks. It uses its financial resources, banking contacts and extensive industry know-how to finance commercial real estate listings quickly and efficiently.