Question

The problems with Fannie Mae, Freddie Mac and other financial institutions were said to have been caused by the securitization of risky mortgages issued to uncreditworthy borrowers along with credit default swaps to insure these risky mortgages. The credit default swaps weren’t capitalized—there was nothing available to pay off on these credit default swaps, so when the borrower defaulted on the mortgage and the credit default swap was to be “cashed in,” there was nothing available and these securitized mortgages became worthless. 108 Graded Project

a. Worldwide, what’s the approximate value of credit default swaps in circulation during this period?

b. How did this amount compare to U.S. and worldwide gross domestic product (GDP) during this period?

Answer 1

Answer a)

A CDS (credit default swap) is a special type of credit derivative to provide hedge against default and other The investors in a CDS makes periodic payments.

CDS was invented by Blythe Masters from JP Morgan in 1994.and gain popularity in 2000s, by year 2007, the outstanding CDS value nearly $62.2 trillion. due to 2008 crisis, the value of CDS was dropped to $26.3 trillion by 2010 and $25.5 trillion in 2012.

Answer B)

The GDP of USA in 2008 = 63.461 trrilion US$ ( as per worldbank report,https://data.worldbank.org/indicator/NY.GDP.MKTP.CD) on current pcrice and reduce to160.168 trillion dollar in 2009.

In comparision to the unpaid value of CDS , its nearly equivalent to the GDP value .

This