Snappy newsletters. Simple Facebook sharing. Spirited comments. Sweet features are waiting… GET THEM NOW!

Debt Insurance Is What Crippled Wall St.

How credit-market swaps helped trigger the financial crisis

By Drew Nelles, Newser Staff

Posted Sep 28, 2008 5:47 PM CDT

(Newser) – "Financial weapons of mass destruction,” Warren Buffet called them: credit default swaps. Pioneered by JP Morgan in the 1990s, these financial instruments were bought by banks as insurance that debts would be repaid. The innovation thrived until firms like AIG started defaulting on credit swaps that insured home mortgages—and Wall Street took the brunt.

Everyone who owned credit-swap-protected home mortgages suddenly faced losses worth billions and credit woes to match—which is why Washington bailed out AIG. Now the fate of credit swaps hangs in the balance: Some analysts advise regulating them, while others want them canned. But "if you outlaw them," one expert warns, "then the financial engineers will just come up with something else that gets around the regulation."

[Images (4)]

[Quotes (1)]

JPMorgan bankers originally thought up the credit-market swap system 14 years ago. (AP Photo/Mark Lennihan, file)

Trader Michael Scagnelli, center, uses his handheld device as he works on the floor of the New York Stock Exchange, Monday Sept. 22, 2008. (AP Photo/Richard Drew)

Credit-market swaps brought AIG to its knees. (AP Photo/Mark Lennihan)

Lehman Brothers, a 158-year-old investment bank choked by the credit crisis and falling real estate values, filed for Chapter 11 protection in the biggest bankruptcy filing ever. (AP Photo/Mary Altaffer)

« Prev« Prev | Next »Next » Slideshow

[Credit-market swaps] made it a lot easier for some people to get into trouble. - Economist Darrell Duffie

« Prev« Prev | Next »Next » Slideshow

To report an error on this story, notify our editors.

More Newser Stories

Public Silence Greets Wall St. Blunders

Small savers are suffering, but giving financiers a free ride

(NEWSER) - America's financiers have driven the country into crisis with stunning recklessness, James Grant writes in the Wall Street Journal, but public anger seems strangely dormant. Populist politicians railed against Wall Street during past financial crises, Grant notes, but today's politicians appear largely uninterested in taking aim at the easy target. More»

Goldman May See $2B Fourth Quarter Loss

Credit downgrades key catalyst in Wall Street titan's loss of value

(NEWSER) - After dodging many of the bullets that left its Wall Street peers wounded or dead, Goldman Sachs faces a net loss of up to $2 billion for the fourth quarter, the Wall Street Journal reports. The loss of $5 per share is five times worse than analysts feared as the firm deals with writedowns across its portfolio. Shares plunged $13.23, or 17%, yesterday. More»

Fed Won't Say Where $2T in Loans Went

Money is in addition to $700B Wall St. bailout; collateral unclear, too

(NEWSER) - The Federal Reserve has lent more than $2 trillion to financial institutions under programs without congressional oversight—and will not disclose to whom or under what terms, Bloomberg reports. The loans are separate from the $700 billion congressionally approved bailout package. Investors and citizens are concerned that the collateral given in these unregulated programs could be improperly valued. More»

Dow Up 401 After Seesaw Day

Investors see signs of gradually easing credit—and bargains, driving up market late

(NEWSER) - Stocks rallied late in today’s volatile session, but stopped short of recovering yesterday’s sharp losses, rollercoastering through an 800-point range, MarketWatch reports. Crude oil futures fell $4.69, to about half of their record high in July, on a report that showed US inventories increasing. The Dow rose 401.35 to 8,979.26. The Nasdaq gained 89.38, closing at 1,717.71, and the S&P 500 climbed 38.59 to 946.43. More»

US Must Save Global Economy —This Weekend

US must join UK's plan or face disaster: Krugman

(NEWSER) - Since the collapse of Lehman Brothers the financial crisis has gone from severe to terrifying, but the response of the United States and Europe has been "woefully inadequate," writes New York Times columnist Paul Krugman. We are now at a tipping point, and if world policymakers don't come up with a coordinated plan—this weekend—then we may well experience the "worst slump since the Great Depression." More»

NEWS FROM OUR PARTNERS

What is Newser?

Face it: there's too much news. At Newser, we choose the most thought-provoking and entertaining stories from hundreds of US and international sources and reduce them to a headline, picture, and two paragraphs. And we do it 24/7—you can come back morning, noon, night (and in between) for something new that matters. Read less, know more.

Learn more »

Partnering with: Slate

View Newser on the mobile website

Debt Insurance Is What Crippled Wall St.