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Blindsided by Jonathan Gifford

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At the Heart of the Credit Crunch

This chain of events lies at the very heart of the ensuing global credit crunch. Nobody can be quite sure which financial institutions are exposed to which credit default swaps. As David Paul, president of the Fiscal Strategies Group, wrote in the Huffington Post in October 2008:

After the AIG collapse, how does one institution trust its exposure to another? If CitiBank seeks a loan from J.P. Morgan, how does J.P. Morgan know whether some event might be looming that will result in a collateral call under some of the myriad derivatives contracts to which CitiBank is a party, a collateral call that in a matter of hours could bring Citibank to its knees.27

As Joseph Stiglitz points out in his book, Freefall, all ...

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