Friday, Feb 20, 2009
Nice graphics
Crisis Of Credit: The Crisis Of Credit Visualized
For those of us that never really understood the difference between a CDS and a CDO.
Posted by paul @ 11:09 AM (535 views) Add Comment
5 Comments
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1. troy said...
Derivatives for Dummies
Katherine Harris
Dandelion Salad
Wed, 18 Feb 2009 22:35 UTC
Recent attempts by corporate media to explain the nature of our economic meltdown have left me ready to bite the ears off mice. They've been superficial, profoundly misleading and, above all, apologias for the likes of Paulson, Bernanke and Geithner. So, having spent every spare moment over the past three years studying the debacle that many saw brewing, here's the simplest explanation I've come up with:
Imagine being able to insure a car that you don't own or use. Imagine it's the car your neighbors will let their teenage son drive, when he gets his license in a few weeks - and you know the kid is a reckless brat.
Now imagine that, by using financial derivatives called swaps, you can purchase as many insurance policies on this car as you can afford to pay premiums on.
When that car is eventually trashed and scrapped, you - and any friends you clued in on the deal - might collect millions, even billions, of dollars. By contrast, your neighbors, who bought real insurance on a real vehicle, get only its Blue Book value (and, one hopes, a chastened child).
This explains the primary problem with swaps. Anybody can bet on anything, so the nominal value of the bets far exceeds the actual worth of any property involved.
Still worse, no tangible or financial asset has to be in the picture
http://www.sott.net/articles/show/176697-Derivatives-for-Dummies
http://dandelionsalad.wordpress.com/2009/02/18/exclusive-derivatives-for-dummies-by-the-other-katherine-harris/
2. bellwether said...
This is just putting money to a bookie with the insurer in the role of the bookie.
I don't see anything fundementally problematic in the model as described, although the insurer is clearly bad at bookmaking.
3. mountain goat said...
Nice video! Thanks
4. 51ck-6-51x said...
yes bellwether - the only time this set up becomes problematic is when the punter or bookie has some way to control the outcome of events.
As I said in another post where troy posted the same text, I prefer to use the metaphor of betting on people's houses burning down, at some point it's going to be in someone's interest just to go there with some petrol & matches.
This is a part of the argument for clearing houses for financial products.
5. Dutch_renter said...
Thanks for linking these vids. Nothing I didn't know but very nice to see it summarized like this.