Friday, September 26, 2008

CDS: My question for the presidential candidates tonight

Senator Obama, Senator McCain,

As you know, under the Bush administration unregulated credit default swaps--which billionaire Warren Buffet describes as "financial weapons of mass destruction"--now exceed $40 trillion. Can you explain to the American taxpayer

a. What a credit default swap is;

b. Why credit default swaps are currently unregulated;

c. How a company with $1 billion of outstanding debt can have $10 billion of outstanding CDS contracts and;

d. How a default on $1 billion in corporate debt, assuming debt recovery at 40 cents on the dollar, becomes a $6 billion loss to credit default swap sellers.

Oh, and a follow-up if I may: What are your plans, if any, to regulate the CDS market in the future? Please be as specific as possible in your responses.

Thank you.
p.s. This is a closed book test, but candidates may refer to the Wikipedia article and this diagram.

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