But credit default swaps -- complex derivatives originally designed to protect banks from deadbeat borrowers -- are adding to the turmoil. "This was supposedly a way to hedge risk," says Ellen Brown, the author of the book "Web of Debt." "I'm sure their predictive models were right as far as the risk of the things they were insuring against. But what they didn't factor in was the risk that the sellers of this protection wouldn't pay ... That's what we're seeing now." Brown is hardly alone in her criticism of the derivatives. Five years ago, billionaire investor Warren Buffett called them a "time bomb" and "financial weapons of mass destruction" and directed the insurance arm of his Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research, Stock Buzz) to exit the business.
But credit default swaps -- complex derivatives originally designed to protect banks from deadbeat borrowers -- are adding to the turmoil.
"This was supposedly a way to hedge risk," says Ellen Brown, the author of the book "Web of Debt."
"I'm sure their predictive models were right as far as the risk of the things they were insuring against. But what they didn't factor in was the risk that the sellers of this protection wouldn't pay ... That's what we're seeing now."
Brown is hardly alone in her criticism of the derivatives. Five years ago, billionaire investor Warren Buffett called them a "time bomb" and "financial weapons of mass destruction" and directed the insurance arm of his Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research, Stock Buzz) to exit the business.
They explained that there was a market for CDS indeed but that it's the risk of the counterpart that is priced (in case I hadn't got that). After I reworded they saw that I had got that. And they admitted that, indeed, some CDS had become worthless because the originator had defaulted. But apparently that was never taken into account in the pricing.
Look, I had at that time only 6 months of working experience in a banking environment, the first 4 of which being on HR projects. And it did not even take me a couple of seconds to see the problem. I can only see two possibilities: -People involved in those markets saw the problem and deliberately pretended it wasn't there (they sure didn't make much noise about it). -To work in derivatives, there is a requirement that, even though you must be mathematically proficient, you must be terminally stupid and unable to understand any of the figures you process. Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
In my experience, the computer programmers were often barely aware of such concepts as "what's a CDS"... Un roi sans divertissement est un homme plein de misères
