Monday, January 26, 2009

RGE - Everything You Wanted to Know about Credit Default Swaps--but Were Never Told

Ok, this is a clear case of substance over form. Great material, but challenging to compress in the few minutes (ok, so negative minutes-but I am always late, so?? ) I have before I have to go to a meeting. BUT it is very good and I definitely recommend looking over it. I will try to summarize later. Two look-ins now

RGE - Everything You Wanted to Know about Credit Default Swaps--but Were Never Told:

"...if CDSs are not responsible for the financial crisis or the need to rescue financial companies, why are they so distrusted? Some observers may simply be drawing a causal connection between the current financial crisis and something new in the financial firmament that they do not fully understand. Misleading references to the large "notional amount" of CDSs outstanding have not helped. This Outlook will outline how CDSs work and explain their value both as risk management devices and market-based sources of credit assessments. It will then review the main complaints about CDSs and explain that most of them are grossly overblown or simply wrong. Improvements can certainly be made in the CDS market, but the current war on this valuable financial innovation makes no sense."
and later
"In light of the consistent failure of traditional regulation, a sophisticated and intelligent regulatory process should now foster risk-management innovations that have been developed by the private sector, especially the derivative instruments that have greater potential to control risk than government oversight. CDSs are one of these instruments, but not the only one."


Miguel Barbosa said...


Great Find!

-Miguel Barbosa

Benedict@Large said...

Great explanation of notional value and its misuse by the press. Wallison is American Enterprise Institute, by the way, but this article is mostly free of right wing ideology, and so is quite useful.