** Private ** wrote: > H = homeowner that has $300k mortgage, is here illegally and claims to > earns $15k a year if it doesn't rain a lot. > B = is the bank that loaned him the money > Ia, Ib and Ic = the companies insuring the loan or AKA credit swap > Ga, Gb, Gc = gamblers buying insurance, betting H can't make his payment > > > B gives money to H and buys insurance from Ia > Ia buys insurance from Ib in case he loses his bet, he'll be covered > Ga&b buy insurance from Ia. > Gc buys insurance from Ia, Ib and Ic. His bet of $18k will pay out > $900k if Manuel La'Bor aka H has a rainy year. > > It rains a lot. H can't pay his loan. > Ia owes H, Ga, Gb and Gc 300k each = 1,200k > Ia has insurance from Ib so he's covered. > Ib owes Ia, Ga, Gb and Gc a total of 1,200k > Ic owes 300k to Gc > > So a 300k default will now cost 1,500k
Defaults will not cost more then the insured security to any single party because in that case that single party would just take over the payments for the owner. But even if the numbers you cite were to be correct, that would not be a significant problem for the economy as a whole. Because all that money isn't disappearing, it is just changing hands. Somewhere there would be somebody (your Gc) earning all that money and looking for new investments. So there would be a massive ownership shift, either through a debt-to-equity swap or through a bankrupcy, but in the end that is solvable. Insurance (including CDS'es) does not affect the size of the loss in the economy, only its distribution amongst the participants in the economy. What is a problem is the reappraisal of the underlying collateral. That is money that is actually disappearing from the economy (even though it only ever was fictional money that only existed because of overstated values). >2) If our president and his tax cheating finance guy really were >geniuses they would pay off H's loan and now all payouts are off. >We're back to 300k. That means if we pay $200 billion in toxic loans, >the 40 trillion is no longer due, problem solved. Plus the 50 billion that Maddoff removed from the system, the 20% reappraisal of commercial real estate that is happening, the balance sheet gaps of insurers and pension funds who held stock etc. Added all together the consensus estimates for the total loss range from 2 to 3.6 trillion, with less then half in residential real estate. > 3) The $40 trillion number you keep throwing around covers every > mortgage in America. Since only a tiny portion can't pay the nut, > we're looking at a much smaller number of payouts. And in most foreclosures the lender recovers some of his loss. Jochem ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~| Adobe® ColdFusion® 8 software 8 is the most important and dramatic release to date Get the Free Trial http://ad.doubleclick.net/clk;207172674;29440083;f Archive: http://www.houseoffusion.com/groups/cf-community/message.cfm/messageid:289476 Subscription: http://www.houseoffusion.com/groups/cf-community/subscribe.cfm Unsubscribe: http://www.houseoffusion.com/cf_lists/unsubscribe.cfm?user=11502.10531.5
