Saturday, February 27, 2010


Ever wondered what a CDS is? First, CDS actually stand for "Credit Default Swap." We are told that the purpose of a CDS is to provide insurance against investor risk. So how could this be a bad thing? Don't most people buy insurance on their homes, cars, lives, etc.?

But a CDS is not your normal form of insurance. Historically, folks who purchase insurance have been required to have what is called an "insurable interest." In other words, you must own or at least have a legally binding interest in whatever it is that you choose to insure. You cannot buy insurance on your neighbor's house because you have no insurable interest in it. If you were allowed to do this, you might be tempted to burn you neighbor's house to collect on the policy. This would not be good for neighborhood relations, to say the least.

But things changed in the 1990s. At that time, Wall Street introduced the CDS market and pretty much ditched the concept of insurable interest. Why, you could now bet on anything by taking out an "insurance policy" on it! Want to see a company fail and profit in the bargain--no problem. There was a bet out there just waiting for you. Wall Street, with DC's compliance, had legitimized a new game: "Let's Burn Down Our Neighbor's House And Profit From His Misfortune." Smell the smoke in your town yet? You will . . .

Continue to live well . . .

Audemus jura nostra Defendere!

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