Talk to Me Like I'm Stupider

More

Our first Talk To Me Like I'm Stupid thread turned out really well. There are some great answers in there. To highlight a few really knowledgeable one's, I thought Sf45, Cynic, and Pacal-Emmanuel Gobry offered some really helpful answers. But my favorite came from Darius Tahir. I thought the following should be the first thing out of anyone's mouth whenever someone says, "What the hell is a derivative?"


A while back me and my buddies were playing poker. I got to the game late so there wasn't a spot for me (the game was capped at eight people). So one of the players was playing absolutely awful and losing a ton of cash. I turn to another guy who wasn't playing and said, I bet he'll be the first out. So we made a bet on it (mostly for sport). 

So, if poker were finance, here's how it would be: the poker players are investing straightforwardly in stocks and bonds and what have you. They're investing in an asset directly. I'm investing in a derivative: my bet is derived from the standing of someone else.

Darius, you can shoot me an e-mail and we'll get you on for that guest post.

I'd like to follow up just to make sure I'm getting the housing portion of this conversation. Credit default swaps allowed lenders to defray the risk for home loan defaulting. These swaps were then bundled and sold. The value was based (1.) on the quality of loans (2.) And the fact that it was highly unlikely that the entire bundle would default, much less a critical mass of bundles. But the ability to bundle the swaps made it easier to loan, thus changing the profile of the borrowers. This meant the data was useless, and a crash (though no one knew when) was almost certain.

Do I have that right? 

We'll have another question for Tuesday.
Jump to comments

Ta-Nehisi Coates is a national correspondent at The Atlantic, where he writes about culture, politics, and social issues. He is the author of the memoir The Beautiful Struggle.

Get Today's Top Stories in Your Inbox (preview)

What Do You See When You Look in the Mirror?

In a series of candid video interviews, women talk about self-image, self-judgement, and what it means to love their bodies


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

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

From This Author