Term of the day: Credit default swap

It’s not that AIG is too big too fail—rather that it’s too connected to the rest of the financial system for policymakers to stand by and watch it collapse.

At the heart of that connectedness is the credit default swap (CDS). Not familiar? Back in March, Janet Morrissey wrote a story for Time.com explaining what they are, why they might be the next crisis (which a lot of people have been saying for a long time, not that anyone did anything about it), and what the effect would be for folks who don’t work on Wall Street. To quote:

A meltdown in the CDS market has potentially even wider ramifications nationwide than the subprime crisis. If bond insurance disappears or becomes too costly, lenders will become even more cautious about making loans, and this could impact everyone from mortgage-seekers to municipalities that need money to fix roads and build schools.

Although in the case of AIG, the Feds stepped in not because of what they knew might happen, but because of what they knew they didn’t know about what might happen. Which makes it better?

Barbara!

Apple CEO Cook Gives Up $75M in Stock Dividends

NEW YORK — Apple CEO Tim Cook is giving up $75 million in dividends on restricted stock that the company is awarding to all of its employees.

In a filing with the Securities and Exchange Commission on Thursday, Apple Inc. said that Cook requested that his restricted stock units not receive dividends. The dividends that Apple workers are getting amount to $2.65 per quarter for each restricted stock unit held. The shares are not normally eligible to receive dividends, so Apple’s decision is a perk for its employees.

wmhumphrey

For an update, we now understand that credit default swaps are part of a larger over the counter (OTC) derivatives market, which is still unregulated.

Back in 1999, Brooksley Borne, the then chairperson of the CFTC, tried to regulate the OTC derivatives market. She was a lawyer in the regulated portion of the derivatives market for over 20 years prior to her appointment to the CFTC, and she foresaw the danger of trading OTC derivatives in the dark.

However, she ran into conflicting interests with Alan Greenspan (Fed Chairman), Robert Ruben (Sec. of the Treasury), and Larry Summers (Deputy Sec. of the Treasury). Together, they were able to convince both lawmakers and President Clinton that the market would be better left alone to regulate itself — laissez faire economics.

Unfortunately for us all, Brooksley was right, and Alan Greenspan has since admitted that “…[his] economic model was flawed.” As a result, the market continues to crumble.

To that point: unemployment remains in the double digits, jobs are scarce regardless of Washington’s attempts, credit is hard to come by, the housing market continues to reel with round two coming, and finally, Greece is about to implode, and at what point will those shock waves reach us? After all, this is a related global market, isn’t it?