We all know that our credit scores are important.  It can be the difference between a fast “approved” stamp on a mortgage application and “selling fish to tourists in t-shirts”.

But what is a good credit score?  Is there a magic number?

Sort of.

Here’s the deal.  Different creditors assess their lending habits in different ways.  While one bank might be willing to finance your new car purchase if your FICO rests at 620, another might advise you to move on to the next lot.  One home lender might offer the best possible rate if you’re at 700, another might reserve their best deals for those who are over the 740 mark.

In that sense, it’s tough to pin down what separates “okay” credit scores from the good ones.  There is a general agreement, however, that you’ll have access to credit at good rates if you can get your FICO to 720.

That’s the closes we can get to a magic number.  720.

A CBS report said that those who hit the 720 mark can relax about improving their numbers.  They stated, “The best number to have is 720 or above. If your score is 720, there’s really no need to try and raise it because lenders lump you in the same category as folks with a score of say 800 or 820.”  

BankRate.com reports that the people who come up with the FICO number, the Fair Isaac Corporation, claim that scores of 720 or better “will get you the most favorable interest rates on a mortgage.”

Others, however, argue that 720 isn’t quite good enough.  The Credit Karma blog argues that 720 “is above average credit”.  That falls in line with those who argue that it is possible to get even better rates if you can push your FICO score into the 750 range.  An article at Boston.com demonstrated that those who have 760+ scores do, generally, receive better credit deals than those in the 720 crowd.

Although there is undoubtedly some advantage to bumping up against the holy grail of 800, it seems safe to accept the 720 number as the dividing point between “good” and “not so good”.  If you have a FIC score of 720, you’re unlikely to be turned away from a loan request empty-handed or with a loan featuring a punishing interest rate.

All of this is couched in terms of the Fair Isaac FICO calculation, which is not the only credit scoring system in use.  Lenders don’t always rely on the FICO numbers and may use alternatives like Experians VantageScore.  FICO, however, is the standard-bearer of credit scores and should give you a good idea of where you sit in a general sense.

However, not all credit agencies access the same information and there are differences in interpretation.  Thus, you can’t assume that you’re going to get the credit you want simply because you make it to a 720 FICO.  Your numbers with other agencies might be considerably lower, and that could lead to problems.

That’s why everyone should take a look at their reports from all major agencies, looking carefully both for ways to boost their numbers and for errors and significant variations between reports.

NOTE:  Multiple sources point out that the average credit score in the United States is 723.  That’s right, the average is actually higher than what we usually think of as a good credit score!  Talk about grading on a curve, huh?  Considering the state of the economy and tightening credit, I wouldn’t be surprised to see the average drop while the idea of what constitutes a good number hops up.

If there’s one thing I enjoy more than a few slices of thin crust pepperoni and green pepper pizza from Pizza Hut, it’s a big steamy disposable cup of chai tea latte from the little cafe that’s tucked into the back of my local Borders bookstore.  

And if there’s one thing I enjoy almost as much as the chai and the pepperoni, it’s books.  I’m a voracious reader.  I’ll read anything you stick in front of me.  You can put me in near the periodicals and I’ll be happy all day hopping from Foreign Affairs to those crazy motorcycle magazines with the bikini models.  I love reading.

My thirst for that chai and my love for all things literary, combined with Mrs. Lampsens penchant for murder mysteries, has made our happy little family a regular fixture at Borders.  We love it the way some couples  love a night out dancing or a trip to Dave & Busters.

But there is one way to make it better without trying to smuggle in a piece of pizza pie.  Borders coupons.  Hey, any time you can do the stuff you love to do while spending less it’s a good thing.  And Borders coupons do hold down prices.

Compared to most retailers who offer lousy coupons, if any, Borders is serious about handing out some big savings. I’ve seen coupons and codes that can trim from between 15% and 40% off your total.  There are also plenty of do this/get this coupons.  Any of them can help you save enough on reading materials to afford a big cup or two of those tea lattes.

You can secure coupons via several different routes.  A simple online search will undoubtedly yield a few, as the photo accompanying this post illustrates (don’t get excited, that one has expired).  I haven’t seen any Borders specials in my Sunday paper, but it wouldn’t surprise me if they do a little bit of print advertising, too.  If you happen to be a professional educator, Borders will always offer you a cut rate.  That’s a nice little perk for our underpaid teachers, who happen to have a tendency to like reading.  The best way, though, is to get them straight from the fine folks at Borders.  

And that brings us to a word of warning to coupon hunters and a bit of encouragement to those of us who dig Borders.

 You won’t be able to hand over your coupon and wait for the savings.  There is an intermediary step.  You usually have to sign up for the Borders Reward program, which is their customer appreciation marketing tool.  The signup is painless, though, and having that membership is a good thing if you like the idea of getting even more top-notch coupons to the bookstore delivered to you.  That also allows you to use various coupon codes to help keep costs down.

I know that big chain bookstores are on the receiving end of a lot of criticism.  People decry their predatory pricing, their tendency to stock Oprah’s favorites at the expense of great lesser-known books, the way they have been running the mom and pop bookshops out of business and the fact that nine out of ten employees know more about the infection risk associated with a nose piercing than they do about the work of Dickens.  

All of those criticisms may be fair, but Borders does have a few things going for it.  First, their always comfortable and inviting.  Second, they have some great activities and story times for the kids.  Third, they make a mean cup of chai latte.  Fourth, but not least, they issue some great coupons that can really take the financial sting out of being well-read.

We were going to order pizza, but I needed to find the perfect Pizza Hut coupon first.

You see, I like Pizza Hut pizza.  Always have.  I like it better than the high-end boutique pizzas, the “take ‘em home and bake ‘em yourself” varieties, the ultra cheap “pie for drunk and/or otherwise impaired college kid” pies and even a deluxe homemade treat.

Meat Lovers is fine.  Pepperoni and green pepper (extra pepperoni) is better.  But it’s gotta be on a thin crust. None of that hand-tossed compromise stuff, either.  And don’t even think of trying to sell me on one of these cheese-stuffed crust numbers.  That’s not my thing.

But I wasn’t going to get Pizza hut.  We had a coupon for another local chain and the price was so insanely low that there was no way I was going to convince Mrs. Lampsen into paying more for the Hut.

Step One.  There were several Pizza Hut coupons in the Yellow Pages of one of our phone directories.  Decent bargains, but nothing great.

Step Two.  I checked the Sunday paper.  I found more than one Pizza Hut coupon there, too. Unfortunately, they were primarily there to sell some new pasta meal thingamajig.  I wanted pie.

Step Four.  I stopped by Pizza Hut’s website.  What a great way to find coupons.  All you need to do is enter your address and ZIP.  You get automatic access to all of the coupons available in your area.  I found several strong coupons, including an early front-runner.  It didn’t make Pizza Hut the cheaper option, but it closed the gap.

Step Five.  I’ve done enough research to know that it would require a little reading and wading through some of the phony coupon sites that are really just traps designed to collect paid advertisement clicks, but I decided to hunt for the perfect Pizza Hut coupon online.

I didn’t find it.  I did, however, find some legitimate coupon offers.  One site offered gobs and gobs of Pizza hut coupon codes.  I tested a few for the sake of blog research.  Some worked, most didn’t.  However, you have to give points to any legit coupon site these days.

Which brings up a rather interesting point.  In many cases, looking for a particular restaurant coupon online is extremely tough.  It can be impossible to fight your way through the bad fake coupon sites.  Even if you do make it through that maze, you’ll often find that some restaurants only do coupons in the paper or not at all.

That is not the case with Pizza Hut.  These people issue so many coupons all over the US (and probably abroad) that you can find real examples in a variety of places.  This is one restaurant for which there is no online coupon shortage.

With a little bit of luck and a very small bit of pouting, I was able to convince dear Mrs. Lampsen that using the Pizza Hut coupon received from the company website would cut the cost down enouhg so as to make it competitive.

She reluctantly agreed, and I was soon on the phone with my local Hut, placing an order.  I was about to launch into my order when I remembered the age-old tradition associaed with ordering a pie.  You simply must ask if they have any specials available.

They did.  It perfectly matched our planned order, too.

Oh, and it was a better deal than I could get with a Pizza Hut coupon.

If you’re familiar with Compass bank and their red and yellow logo, prepare yourself for a change!  Compass is being rebranded as “BBVA Compass”.  That’s right, the old Compass is on its way out and will be getting a facelift.

All locations will have new signage and all other aspects of the Compass business will be rebranded.  Officials suggest that they’ll have the job done by the end of 2009’s first quarter.

It will be a big job.  Although Compass Bank doesn’t carry the same name recognition as Bank of America or Chase, it’s a true industry giant.  Compass, now BBVA Compass, boasts 579 different branches and is one of the United States’ ten largest banks.

Why the name change?  Even though Compass has been successful under its existing name, Banco Bilbao Vizcaya Argentaria decided it was time for a change.  BBVA owns Compass Bancshares who, in turn, owns Compass Bank.  According to the Abilene, Texas, newspaper:

“The BBVA Compass brand is more than just a logo, it represents our ongoing commitment to our communities and the future of Compass Bank,” Manolo Sanchez, CEO of Compass Bank, said in a news release. “This new brand is a symbol of strength to those who desire the security of a financial institution strong enough to withstand the economic turmoil, yet diverse enough to meet their financial needs.”

The rebranding isn’t just a Compass matter, though.  The same company is looking to successfully bring a collection of different banks under one roof, as the Birmingham Business Journal explained:

The name change is a harbinger of the company’s year-long effort to fold BBVA’s three other U.S. banks into Compass, which included Laredo National Bank, State National Bancshares and Texas Regional Bancshares.

Online banking has long been a hallmark of Compass Bank.  Online tools have been a priority for the institution and many of its customers maintain a relationship with the bank because it makes banking via the Internet easy.

The name change does not portend a shift in the Internet emphasis at Compass Bank.  Online transactions should remain easy and account-to-account transfers should remain both free and immediate.

CompassPC, the Internet banking software used by Compass may get a name change, but there’s no evidence to suggest that any features will be significantly altered or removed as part of the rebranding efforts.  The changes seem far more cosmetic and branding-oriented than reflective of any real change in insitutional philosophy or practice.

CompassPC is sometimes regarded as one of the best online banking packages available.  The software handles all of the basics as well as many value-added functions.  Users can, for instance, set up email notices for account events, opt out of the receipt of paper checks, and integrate Compass data with all popular money management software packages.

It’s important to remind customers of Compass that the changes are not indicative of any instability or potential insolvency.  Undoubtedly, Compass has been adversely impacted by recent financial circumstances.  However, there is no sign of trouble with respect to the institution’s long-term stability or solvency.  The change from Compass to Compass BBVA is should not be a cause for any customer alarm.

The small banking company that started in 1963 has grown to nearly 600 locations and an enviable position in the hierarchy of full-service US Banks.  Although ownership interests may shift and names change, there’s no reason to believe that this banking Goliath will do anything other than to continue to grow.

Hi Everyone,

Here are the Blog Carnivals that we participated in over the last week.  Please visit the carnivals as there are informative personal finance posts for you to enjoy.

- Carnival of Personal Finance #186 (The Fairy Tale Edition) was hosted by Clever Dude and you can find our post entitled Reports of Capitalism’s Death are Greatly Exaggerated listed there.

- Carnival of Debt Reduction was hosted by American Consumer News and you can find our post entitled Investing vs. Paying Down Debt – Which Way Should You Go? listed there.

- Festival of Frugality #159 was hosted by Dough Roller and you can find our post entitled Cars for Under 500 Dollars: How to Find Them listed there.

- Festival of Stocks was hosted by Stock Pursuit and you can find our post entitled Cars for Under 500 Dollars: How to Find Them listed there.

Based on past advertising, you might think that everyone employed by Frost Bank wears a Stetson and cowboy boots.  Recognizing that consumers tend to put their money with someone they trust and to whom they can relate, Texas’ Frost Bank is quick to remind everyone in earshot of their local roots.

According to a pitch from a few years ago, they’re “Texans first and bankers second”.  That’s a good tagline and a great summation of the Frost Bank promotional angle, but all of that “aw shucks”, down home talk is draped over an innovative member of the United States’ Top 150 Banks.

If you can’t hum “The Yellow Rose of Texas” on demand, you may not be acquainted with Frost Bank.  It’s located in the Lonestar state with headquarters in San Antonio.  It’s a venerable institution, founded in 1868 and still going strong.

In fact, it’s going very strong.  Current assets total around $13.2 billion dollars, making Frost the 74th largest bank in the USA.  Frost is obviously doing something right.  While other banks struggle in the current economy, there’s little indication that Frost is in trouble.  Now in its third century of operation, It’s showing the kind of resiliency that undoubtedly contributed to its ability to survive the bottom falling out of the Texas oil market in the 1980s.

Although Frost is known for emphasizing “roots over rates” in past advertising campaigns, that’s a marketing decision–not a necessity.  Frost has an enviable track record of embracing new technologies and methodologies while providing customers with a full slate of commercial banking products.

Deaf Link technology is a perfect example.  Frost Bank is a step ahead of the competition with regard to outreach to the hearing impaired.  According to one source:

Frost Bank has teamed with the San Antonio-based company Deaf Link to place videophone equipment in some Frost branches that will allow deaf customers and bank employees to communicate with help from a certified Deaf Link interpreter who will interpret via videophone.

That kind of accessibility can spell the difference between building relationships and losing customers.  That’s a common theme with Frost, who also managed to get ahead of the curve in the area of remote deposit captures, allowing customers to make deposits more easily and from a variety of locations.  In a Financial Services Technology article commending Frost, exec John Murrel explained why the bank aggressively pursued the development:

“The most obvious [advantage is] the reduced number of trips to the bank. Beyond that, remote capture is helping companies improve deposit accuracy, speed the settlement of check payments, enhance reporting capabilities and lower paper handling costs by eliminating deposit tickets and check copying. Plus, companies can transmit checks at any time, improving the availability of funds through extended deposit times.”

That’s the kind of attention to customer demand that’s keeping Frost Bank in the Top 150.

With a substantial asset base and strong customer outreach, Frost bank appears to be in a very strong position.  Their head honchos may claim to be “Texans first and bankers second”, but that obviously doesn’t mean they’re second-rate bankers, at all.

NOTE:  In addition to banking services, Frost has another claim to fame, the Frost Bank Tower in Austin, Texas.  The thirty-three floor structure was the first high-rise to go up anywhere in the United States after 9/11 and it’s the second largest building in Texas’ state capital.  Construction of the Tower began in late 2001 and was wrapped up by 2003.

In North Carolina, WRAL-5 is running one of their “5 on Your Side” television news features.  The station reminds its viewers of how important it is to have a plan to pay off debt and it outlines a few simple steps everyone can take to reduce their debt burden.

Within a few minutes of that story hitting the air, the CBS affiliate will share another message to its viewing audience–this time in the form of paid advertising.  Barely removed from dire warnings about reducing debt and comments from experts who recommend a “cash diet”, WRAL will turn into a platform for selling everything from unneeded $20 novelty products to automobiles that cost in excess of $35,000 (financed over 60 months, of course).

It’s a mixed message, to say the least.  While the news crews are smart enough to assemble warnings against debt extension and overspending in a tight ec0nomy, the station can’t raise the money necessary to make the pronouncements unless someone is willing to pony up for advertising.

And advertisers aren’t going to do that if the “5 on Your Side” message of personal responsibility sinks in with the audience.  If people really do go on a cash diet, WRAL-5 will be suffer the consequences.

The station isn’t alone, of course.  The same story, or variations of it, is repeated in every media market.

KLTV-7 in Tyler, Texas, is offering advice on managing credit card bills, encouraging more responsible spending.  Meanwhile, the homepage of the television station’s website is running an ad from JB Byrider, a sub-prime used car chain with a very questionable financing reputation.

Baltimore, Maryland’s, ABC-2 wants you to pay off debt and to take control of your credit cards.  They put together a week’s worth of tip segments to kick off the new year.  I’m willing to bet that at least a handful of slickly-produced ads encouraging irresponsible or unnecessary spending are going to find their way into tonight’s broadcasts of Wife Swap and SuperNanny.

It’s the same story on every commercial station, of course.  Advertising pays the bills and it only cuts checks because it convinces people to spend money.  Those news pieces reminding people to pay off debt?  The stations couldn’t afford it if they worked too well.

The fact that news departments are willing to act in direct contradiction (at least in one segment per evening) with the commercial viability of the station could be a good sign.  It’s an indicator that cash doesn’t yet completely buy and sell the news.  We should be thankful for that.

But the underlying lesson of this split personality is somewhat troubling.  Is it possible that, from news director to ad buyer, everyone knows a 2-minute “pay off debt” segment simply can’t overpower twenty-three hours and fifty-eight minutes of hyper-consumerism and tempting advertising?

The “Kill Your Television” crowd may be a little over the top, but they might be onto something.  Comments like those made by John Heckman Wright do have resonance:

Marketing, particularly in the form of television commercials, has so desensitized the viewing public to these connections, through constant repetition, that the rest of the story is no longer necessary in order to sale a product. The general viewing public needs only the symbols, the punch lines, whereas we need a marketer to draw logical, thoughtful connections before hear the persuasion. In essence, by giving up television, the husband and I have become bad consumers. The easy jargon of the marketer fails on us because we do not make such simple connections. Our minds are focused on our lives, and we do not “turn off” several hours each night for a marketer to sale us the latest “must have” product.

On the other hand, maybe the do-gooders at Delaware’s WOBC-TV will make a difference as they continue their Wednesday and Friday partnership with Consumer Reports.  They’re willing to preach the gospel of responsible money management as a sliver of their newscast twice a week, after all.

If you’ve given any thought to successfully managing your personal finances, you’ve undoubtedly learned that one of the most important thing you can do is to establish an emergency fund.

Setting aside cash to handle unanticipated expenses is often the best way to shield oneself from a dramatic financial crisis and virtually any financial planner worth his or her salt will insist that a client build up adequate savings before exploring more aggressive investment options.

Today, the need for a “safety net” is even more pronounced.  Credit isn’t as available as it was a few years ago, making the credit card (which was always a horrible substitute for cash savings) into a complete non-option.  Unfortunately, tight economic circumstances are also making it more difficult to build savings.

That may lead some people to wonder if a home equity line of credit could fill the safety net role.  That line of thinking isn’t new.  People have been relying on the fact that they could secure a line of credit against the equity in their home as a “backup plan” for years.

Recent news, however, suggests that the home equity loan may not be a viable alternative to cash savings anymore.

A recent Associated Press article explains:

Building a six-month emergency fund may be a near-impossible stretch for many. Taking out a home equity line of credit of $30,000 or more can help fill the gap.

Dipping temporarily into the home equity line would enable you to leave other investments with better yields intact.

Getting one may be more easily said than done without a stellar credit score, however, especially with home prices still falling. Many people with existing HELOCs are having them cut.

The downturn in the real estate market and the oft-discussed “credit freeze” are making it much more difficult to secure a home equity line of credit.  As home values continue to decline, banks are more reluctant to extend additional credit to those who have established equity lines.  They’re also less likely to extend a “HELOC” to those who don’t have one already.

Even those who already have home equity lines are learning that they don’t offer the kind of security one can have with adequate savings.  That’s because many banks are actually capping and cutting existing lines.  People who operated under the assumption that they had $X of credit available to them in case of emergency are getting letters telling them that their limits have been lowered, sometimes creating nerve wracking circumstances.

It’s hard to blame the banks for taking this position.  As foreclosures mount and home values drop, it’s becoming increasingly clear that “home sweet home” isn’t carrying the cache it once did.

The latest numbers indicate that the number of missed payments on HELOCs are up.  From a lender’s point of view, a home equity loan just isn’t as safe as it once was, so they’re cutting back.  Larger economic forces are also keeping banks rather timid, as they try to minimize their risk exposure in a volatile economy.

So, if you’ve been thinking of a home equity line of credit as a stand-in for savings, you should rethink your position.  It’s becoming clear that one shouldn’t rely on a HELOC to cover unanticipated expenses or emergency needs.

The alternative?  It’s not pretty, but it works.  Save the money.  Sure, it’s tougher for a lot of people to get the job done right now, but it’s the only way to protect yourself against nasty unforeseen circumstances.  If you don’t have an emergency fund, start building one now.  Go through your budget with a fine-tooth comb and start finding out how you can build an adequate cash reserve.

It doesn’t matter if you’re asking a high-minded finance guru or your relatively well-informed next door neighbor.  When it comes to advice about getting your personal finances in order, they’re both going to start with the same little chunk of advice:

Put a budget together.

Until you know how much money you’re actually spending and where you need to keep spending it, there’s really no good way to plot your financial future.  A budget is a prerequisite to financial planning.  Without it, you can’t really strategize.

The problem is that putting together a budget can be a pain in the you-know-what.  That’s not only because it presents us with the sobering facts about our expenses, but also because it requires a real attention to detail and an ability to pin down exactly what your expenses are.  Basically, it’s very important but very tedious.  And it’s way too easy to make a mistake.

And that’s why so many  people are looking for free budget worksheets.  They’re hoping that a nice pre-printed (or at least pre-prepared), step-by-step form will make it easier to put a budget together.

They’re right.  Good free budget worksheets do make it easier to take those first critical steps twoard a successful finacial future.  They make budgeting easier.

There are many differet options in the world of worksheets for would-be budgeters.

After looking at many of the budget worksheets out there, I came up with the following list of valuable options.  Without further ado, I present the best free budget worksheets on the Internet.

Living a Better Life. Are you looking for a general, all-purpose budgeting form or do you need something special to help you with holiday spending plans?  This site has you covered either way.  Their core budget worksheet is fairly good and is probably sufficiently detailed for most users.  Their specialties forms could be a good way to deal with special circumnstances.

I Love to Know. Their page of budget tools is primarily a link to other free resources.  It doesn’t apear as if I Love to Know actually publishes any of their own forms.  They still make the list, however, because they do link to some of the best options online and because they supplement those offerings with several sample budgets for peoples who are living at various income levels.

Mom’s Budget. This is a treasure trove of free budgeting forms.  Believe it or not, they have over 100 forms available for free download.  Whether you’re looking for a form kids can use or something for senior citizens, you’ll find just what you need.

Bukisa’s Free Budget Worksheets. One of the contributors at Bukisa has come up with a nice collection of worksheets.  We have all the usually goodies, but that’s supplemented with some strong specialty forms.  Oh, and many of the pages available for download are actually pre-configured spreadsheets, which can be a godsend for those of us who feel at home with Excel.

Thrifty Times. Thrifty Times offers three different free worksheets.  One tracks expenditures, one helps the user develop a spending plan and the final offering aids in debt calculation.  These are straightforward, bread and better worksheets and the expense form seems sufficiently comprehensive for most people.

Money3rd. A debt rolldown worksheet and a statement to help in the calculation of net worth headline Money3rd’s collection of free resources.  There’s no need to let vanity run your budgeting, but it is worth mentioning that these PDF’s are good-looking.

Nothing it going to make budgeting fun.  Good forms, however, can make the process more enjoyable than it would be otherwise.  Good free budget worksheets can also increase the likelihood of getting your numbers lined upt the right way.  If you’re ready to get down to budgeting, do so with the right worksheets at your disposal.

Here’s a riddle for you…

What product is often compared to insurance by experts even though other experts make a point of saying it shouldn’t be confused with insurance?

What product’s market is said to be worth seventy trillion (yes, trillion with a “t”) dollars even though no one knows how much the product is actually worth?

What product’s market has been completely devoid of regulation even though experts had been cautioning that its crash was impending–and that said crash would have massive repercussions?

Give up?  The answer is the credit default swap.

If you’re like me and virtually everyone else in the world, you may have heard this term once or twice in passing over the past several years only to see it in the headlines almost every day for the last several months.

And, if you’re like me, you could probably use a hand making sense of the discussion surrounding credit default swaps.  Let’s see if we can break down this complicated financial instrument so it all make a little more sense…

Defining a credit default swap isn’t that tough.  Lil’ ol’ Wikipedia actually does a good job of laying it out:

A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments (premium leg) to the seller, and in return receives a payoff (protection or default leg) if an underlying financial instrument defaults CDS contracts have been mistakenly compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if a specified event occurs. However, there are a number of differences between CDS and insurance; the buyer of a CDS does not need to own the underlying security; in fact the buyer does not even have to suffer a loss from the default event.

That gives you an idea of what a “CDS” is, but it doesn’t really explain why they exist.  We can turn to Investopedia (that’s two “pedias” in one post, kids!) for a little context:

The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.

Which brings us to a more pragmatic consideration.  Who, specifically, has been using credit default swaps and why have they been doing it?  Time Magazine explains it rather nicely, even though it does tread on the wrong side of the Wikipedia definition’s admonition against making a comparison with insurance:

Credit default swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default. They typically apply to municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and others. The buyer of the credit default insurance pays premiums over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It’s supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft.

Now that might not seem like the biggest deal in the world when you consider the scope of the overall economy, but it actually is one of the biggest things out there.  The CDS market was a seventy trillion dollar business.  And almost 40% of it is in the hands of major financial institutions.

So, why is that a bad thing?  Sure, there’s a lot of money in the CDS market.  That, in and of itself, isn’t a problem.  What’s the problem?

There are several.

First, a lack of regulation/oversight/rule-making/whatever led to a very serious problem in the credit default swap biz.  Namely, people started trading these instruments back and forth with no one really bothering to consider whether the people taking on the risks associated with the swaps actually had the means to make good on them in the event of a default.  That wasn’t a well-known problem until…

Second, (you guessed it)  defaults started happening.  You can blame that on the subprime mortgage crisis or any of the other potential explanations for our journey into the land of recession.  The fact of the matter, however, is that defaults started springing up and the folks who were supposed to be able to cover the associated costs have been coming up short.

Third, these defaults and the failure of credit default swaps is giving banks a good reason to reconsider some of the bond lending and other investments they were willing to make earlier.  All of that talk about a credit freeze is starting to make sense, isn’t it?  As the aforementioned Time article noted, ” this could impact everyone from mortgage-seekers to municipalities that need money to fix roads and build schools.”

Fourth, there’s this even bigger problem of a potential domino effect.  You see, all of that crazed CDS trading, in hindsight, seems a little divorced from reality.  Consider that one expert explained that those who own default swaps don’t even know what they’re worth.  No one does.  No one has any good idea to figure that out, either. That led him to ask a very important question:

How does a global financial system work when you don’t know how to value assets?

The answer is scary because a global finance system may not be able to work at all under those circumstances.  Remember, we’re talking about seventy trillion in investments.  Thus, one columnist stated:

It could take years of litigation to figure out who owes whom what. The fear is that once the system starts failing, there will be “cascading defaults” and because the CDS market is so huge, its failure threatens the whole global economy.

I know this post is a little heavy on the doom and gloom.  It’s worth noting that not everyone shares the perspective that the CDS market’s unraveling will lead to all of us living like Man and Boy in The Road.  Whether they believe that letting the market run its course or appropriate interventions can stop the “cascade”, there are people from all economic and political persuasions who do see a way out.

Let’s hope one of them is right.

And that we follow his or her advice.