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Before I read this book there was something I didn't understand about Credit Default Swaps, or CDSs, which are insurance policies, hedges against an investment failing. They are a way to short things that aren't stocks. In fact you can by a CDS for anything. You can buy a CDS against the Yankees losing the World Series. But they are a weird kind of insurance. You don't have to own the Yankees to insure them. And both you and I could insure against the Yankees losing the World Series. Hundreds, thousands, even millions of people could do it. There's no limit to the exposure. So if the Yankees were to fail, i.e. fail to win the World Series, theoretically they could take the US economy with it, because of the way they were writing these policies in the days before the real estate bust. Another example, fire insurance. You could insure someone else's house. Even if it was already on fire. And it would be priced as if fire was only a remote possibility. And since credit default swaps are unregulated (thank you Reagan, Clinton, both Bushes and the U.S. Congress) no one knows how many CDSs have been purchased against any event. So you end up with the prospect of a small company being too big to fail. BTW, this is why the US taxpayers had to back the investment banking industry with over $1 trillion of our money. The same people who are buying our government all over again. Question: Did we outlaw Credit Default Swaps or at least regulate them? (Heh.) |
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