Posted on 09/27/2008 1:16:46 PM PDT by politicket
That's a better analogy in some limited ways, but the implication of this trend in "financial news coverage" is not to compare investment professionals to the cool and unflappable professional gamblers of noir cinema. It is meant to imply a bunch of rubes playing roulette.
The jaded scorn of a green-eyed hipster.
Actually, it gives plenty of insight because it tells the reader what is really going on.
The investment professionals wants to pretend that they have some in depth knowledge about where risks are located, and how much risk there is, that they have everything figured out in nice little formulas that can predict how much money you’re going to make.
They are lying, either to themselves or to the public, they don’t know, their knowledge is woefully inadequate.
Because if they did know, then communism would work. All we we do is just put these professionals in charge of the planned economy and they can allocated financial resources in the economy in the most efficient way possible.
bttt
If the reader has no understanding of financial economics before reading the article, the article itself will not give the reader the knowledge needed to make sensible comments.
Lots of good facts there, but I'm not sure how you obtain your conclusion. Once the default risk of some securities is transformed into the default risk of a major CDS counterparty like AIG, then the pricing calculation turns into a govt bailout probability calculation which is indeed what happened.
At the same time the holders of the CDS like Goldman Sachs who used them to speculate on the default crisis as a whole have a economic incentive for particular failures, because the more likely the underlying MBS are to fail, the more GS's CDS for them are worth.
It's a tool for complete financial system failure, not a gun to shoot a specific target, but a building full of gunpowder in the center of the financial district.
The issue is not whether something is dangerous “only when used unwisely”, that is not the criteria. The criteria is when it is used unwisely, what are the potential fallout of such an incident.
If the fallout is mainly localized to the person making the unwise action, then we allow it because the individual bears the risk. But if the fallout engulfs a significant portion of the public as collateral damage, then society has a right to step in.
If you’ve got a ping list, add me. And while we’re at it, cut to the chase. How bad are things going to get?
You said it before I did, see my previous post.
No it doesn't.
I explained how CDS actually works in post 19.
You didn't understand post 19 - all you took away from it is my distaste for the inaccurate use of the word "bet."
You can continue playing that semantic game all you like, but before you can claim that you know what "is really going on" you'll need to be able to comprehend the rest of post 19.
I may have missed it but before I read all this, I would like to understand who my teacher is. Can you please post your qualifications? Thanks much!
CDS transactions have maximum profits when risk is transferred from two parties to society as a whole. AIG is a perfect example, their business increased profit by insuring MBS and corporation against default. They had absolutely no way to paying the default obligations in the case of a housing bust or recession. But the systemic risk that would results from their failure lowered the market price of their own chance of failure because the market added in the probability of the govt bailout.
I’m not the one playing semantics games, I’m not the one to focus on the word “bet” to begin with, you are.
And I understood the rest of your post just fine, you may thing it’s something really complicated, but really, it’s not.
This was incredibly informative and easy to follow, exactly what I’ve been looking for. Thank you very much.
I didn't focus on it. My original post mentioned it in passing. All your subsequent posts to me have focused on it.
And I understood the rest of your post just fine
I don't think you do.
you may thing it’s something really complicated, but really, it’s not.
Before the all the mind-bogglingly stupid posts and articles about CDS, I assumed one could explain CDS to a child.
But it seems nine of ten journalists, commentators and even FReepers cannot grasp the notion of reference obligation.
It is an exchange of one asset for another asset - that's all.
If an institution’s basic business strategy is shifting risk from its clients to the public, then the public should have every right to shut it down and decline bearing the risk.
Self ping for when my brain's working better...
Exactly. CDS's currently have value (at least on the books, when potential contra-party failure is ignored). This CDS value is counted as part of institutions' assets. This is why the Paulson plan has:
(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.The Paulson plan does not just contemplate buying defunct mortgages. It plans on buying ALL toxic derivatives
The Republican plan, however, just insures the mortgages that underly the MBS's, which would have the net effect of making the CDS's worthless. This would be very bad for Goldman Sachs, which is why the Dems are in such a screaming fit to get the Paulson plan passed.
“I didn’t focus on it. My original post mentioned it in passing.”
Yes it displayed fully a flawed mindset.
“I don’t think you do.”
Whatever, A bets on an investment, then A places a few side bets to hedge against some of the risks in the initial bet. So now you want to call them “tools” instead what they really are, side bets.
I got it just fine.
Systemic risk is an issue for the regulators of the institution. The regulator should work to assure that institutions under their watch manage their risk appropriately. Systemic risk is not created by the credit derivative but of particular uses of such instruments. A total ban on all credit risk shifting because certain uses present systemic risk is unwise. A bullet in the head is not a cure for cancer. Consider dealing with the problem surgically.
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