How to eliminate risk without even trying

More

Gretchen Morgenson in Sunday's NYT floats some potential fixes for the credit default swap hangover -- worth reading.

How detached from reality did we become as this world of derivatives grew ever larger and profitable for those who peddle them? Here's a story one Fortune 500 CEO told me when I shared my fears that credit default swaps could be the next big shoe to drop:


I have no unique perspective on CDSes, but I have to admit that when I first learned of them, some years ago, and got an explanation of how one worked on our own company, it went like this: "Say you own company X's bond but don't want to take company X's credit risk. Then you sell a CDS, pocket the difference, and you've eliminated your risk of default by X. You basically then own a government bond." My reply was: "I used to work on Wall Street. In those days, if you owned an XYZ bond and didn't like the credit risk, you would sell the XYZ bond and buy a government bond. Then you didn't 'basically' own a government bond. You actually owned a government bond." The banker I was talking with had no reply to that.

Matt Miller is the author of The Tyranny of Dead Ideas.

Jump to comments
Presented by
Get Today's Top Stories in Your Inbox (preview)

Why Did I Study Physics?

In this hand-drawn animation, a college graduate explains why she chose her major—and what it taught her about herself.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Why Did I Study Physics?

Using hand-drawn cartoons to explain an academic passion

Video

What If Emoji Lived Among Us?

A whimsical ad imagines what life would be like if emoji were real.

Video

Living Alone on a Sailboat

"If you think I'm a dirtbag, then you don't understand the lifestyle."

Video

How Is Social Media Changing Journalism?

How new platforms are transforming radio, TV, print, and digital

Video

The Place Where Silent Movies Sing

How an antique, wind-powered pipe organ brings films to life

Feature

The Future of Iced Coffee

Are artisan businesses like Blue Bottle doomed to fail when they go mainstream?

Writers

Up
Down

More in Business

Just In