Tag asked:
"Why instead of a bailout didn't the government void those contracts and
have the initial purchase refunded or have them get a modest return?"
--End of quote--

Without going into a way-too-long constitutional discourse, I'll only say
that:  "the government" doesn't have the authority to do this.  

Contracts are entered into between private parties.  From the inception of
the country, the constitution has provided, and the Supreme Court has
endorsed, the basis rule that the powers of the federal government are
limited, and cannot infringe on the powers provided to the states, or held
by the public.  Even though it involves interstate commerce, it is unlikely
that any federal law that voids a private contract retroactively would be
constitutional.  It is my guess that no such state law would be enforceable

Even if the law could be respected, it would be a commercial disaster.
Imagine how chaotic commerce would be forever after, if any contract could
be reversed by a law, after the fact.  Who would want to do business in that
--End of spouting and claiming to know something--

Mike explained that life insurance is comparable to the insurance written on
these derivatives.  Let me add that the life insurance companies, with great
prudence and consistency, avoid getting stuck in very bad times.  How?  By
excluding coverage for death due to war or other cataclysm.  Derivative
insurance would be hard to write like that, and it is likely that any policy
with such a carve-out would make the product unsalable.

Please, please, please don't make me explain mark-to-market.  I have a lot
of work to do, and the topic is really dog-awfully boring.

David Merfeld, (?fine?) "CPA member"

-----Original Message-----
From: Vermont Skiing Discussion and Snow Reports
[mailto:[log in to unmask]] On Behalf Of Mike Bernstein
Sent: Thursday, October 30, 2008 6:45 PM
To: [log in to unmask]
Subject: Re: [SKIVT-L] OT: For Mike B

On Thu, 30 Oct 2008 11:53:00 -0400, Tag <[log in to unmask]> wrote:

>As I read more about this financial collapse, it seems that the culprit
>wasn't so much the MBS as it was the CDS. My question is if many of these
>CDS were purchased for pennies on the dollar by players that weren't even
>involved (they have been described as side bets), why instead of a bailout
>didn't the government void those contracts and have the initial purchase
>refunded or have them get a modest return?

Well first, I think you have to realize that it's all a chain reaction which
from the default on a house that shouldn't have been purchased, financed by 
money that shouldn't have been leant.  The MBS are really a key cog in that 
chain b/c they are the conduit through which troubles in the housing market 
got to Wall St. in the first place.  Of course, the whole CDS mess is indeed
big tihs show, and it is far more complex than anyone could dare to try and 
explain.  I honestly don't have an answer for you b/c I don't know enough 
about the derivatives market to make an informed opinion.  

For what it's worth, I wouldn't say that CDS were purchased at pennies on
dollar.  They act like any other sort of insurance policy.  You pay X amount
premiums for Y amount of insurance, and the size of X depends upon the 
perceived riskiness of Y.  In life insurance, they've got eons of actuarial
to work off of so as to properly price X, but X is always a small fraction
of Y.  
For CDS, X was also a small fraction of Y, as it should have been, but there

was a lot less data to work with and clearly both the regulators and risk 
managers at many firms were asleep at the wheel or, more likely in the case
the latter group, making too much money hand over fist to really care.

Again though, I really can't give you an answer on the "why not just 
unwind/invalidate" argument.  I suspect it has a lot to do with the
of same and very little to do with any effort to protect one's buddies at 
Goldman, if that's what you're looking for.

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