Credit default swaps for dummies

Steven Kyle at AmericaBlog has an excellent and easy to understand explanation of credit default swaps. They allow a pretend type of insurance to be bought and sold against mortgage backed securities. Whoever thought sellers would actually have to pay when the mortgages went bad?

Worse, what if I bought CDS against your company, then deliberately drove it to its knees (while shorting the stock presumably) so I could collect. Well then, your company would be rubble, but I’d be richer.

We need financial reform. The guys who were doing these kinds of things can’t be trusted. It is like giving children a box of blue tipped matches that will light on any surface. It is time for the grownups to step in and take away the toys.

He’s too kind. This wasn’t just unknowing children playing with matches, it was also thugs and criminals who didn’t care if they burned down your house.

Mario Puzo, author of the Godfather,was once asked what he thought of the Mafia. He said at first he thought they were kind of romantic, had a code of honor, but the deeper he researched, the more he realized they were just vicious thugs with few if any redeeming characteristics.

I wonder, is it much the same with investment banks? Cut through the elegant sheen and are they mostly just a bunch of thugs?


  1. What elegant sheen? That’s just excess wealth.

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