One of the things Wall Street does best is confuse people. They are brilliant at it, making simple things seem complex. So today we’re going to go over one of the things they’re trying to make obscure and make them simple—‘credit default swaps.’ A credit default swap is nothing more complex than insurance. I pay an insurance company roughly $600 every six months and if I crash my car they have to pay for it. I’m paying them a certain premium to assume the risk of me crashing my car. CDS is the same thing, but for bonds. I’m paying someone to assume the risk of my bonds not being paid off. I strike a deal with Party X and they agree that if Company Y goes busto and defaults on their debt Party X will pay me the face value of the bonds that Company Y issued. Simplest fucking thing in the world, it’s bond insurance. Why does Wall Street bother to make up a weird name?
I think there are two reasons. First, ‘swaps’ are where the smart guys work. Insurance, well, that’s pretty simple stuff. If you’re looking for insurance you might shop around and try to get the best deal. But swaps, well those guys talk all kinds of smart math shit about risk and spreads to LIBOR and Greek letters and so on, so fuck me they probably deserve the fat fees they’re making selling CDS. Second, selling insurance is kind of like the finance version of playing for the LA Clippers. Sure, somebody has to do it, but nobody really wants to. It’s definitely not what a Master of the Universe on the Street wants to do with his time. Insurance salesman drive minivans and take vacations in Michigan, they don’t joust with other Masters of the Universe on the Street. So instead of bond insurance we have credit default swaps.
I remember back in the Pleistocene when I was in college, I took a women’s studies class, the only class in that department I ever took. I assume this was a Hail Mary pass to get laid, because my distaste for social science classes was set by about the eighth grade. In any case, we were assigned some Andrea Dworkin type to read about sex and there was a lengthy bit about how the blowjob is the most male dominant version of hetero sex. (Homo sex was not under consideration). It’s male-only pleasure, it’s phallic worship, the woman is physically below the man, etc. and so forth. Even back then, though, I remember thinking that even if I grant that the blowjob is a male dominant thing, putting your dick in range of the chick’s incisors mean that the chick at the very least has some say in the matter.
I’d say that’s not a bad metaphor for the relationship between the government and banks right now. I’m not sure who is blowing who, but let’s say Wall Street is the blower and the US government is the blowee. Wall Street has those incisors right there, even if they’re the ones being subservient, and if you saw Vikram Pandit testifying to Congress, the banks are being plenty subservient these days. Their incisors in this case are all the fucking money we have given them. The US government does need that money back, or at least as much of it as the banks have not wasted in the interim. And because of that the banks hold a certain amount of power, even if that power is only the power of a suicide bomber. Or the dick chomper.
Between the Fed, the Treasury, and the various ‘bailout’ plans, large commercial and investment banks have taken trillions of dollars of money that, at some point, the government is going to need back. Michael Lewis, the very fine writer for Bloomberg and other finance outlets, put it this way in a fictitious letter from a hedge fund guy. ‘Some fool comes along and gives you $15 billion, no strings attached. The fool doesn’t own you. You own him.’
What has become abundantly clear is that however much we have given the banks they need rather a lot more. AIG had a British division that was writing CDS as if 2005 and 2006, years with historically low defaults on all kinds of debt, were the norm instead of the exception. That is, they were selling insurance on debt with the assumption that everybody would pay their bills on time, now and forever. From the condo flipper in Phoenix to the dealmaker buying an office building in London, everyone in the end would pay their bills. Despite the fact that historically a fair number of condo flippers and London office dealmakers go broke and ignore their bills.
That’s like my car insurance company writing policies as if almost nobody ever drives drunk and the odd fender bender is all they have to deal with. But instead, thanks in large part to the end of the real estate bubble and Great Crash 2.0, there’s a deadly 35 car pileup on the GW Bridge every fucking morning. Day after day after motherfucking day. The banks wrote the CDS for the Perfect Calm and got the opposite.
One of the most overused terms in this mess is ‘unprecedented.’ If a person knows a bit about the history of US markets there are plenty of precedents for insane confidence and equally insane fear. And bankruptcy and disaster. That’s how markets work. That’s pretty common stuff. But this is, in fact, A Big One. The only thing unprecedented in this meltdown is the degree to which the Fed, the Treasury, and the banks and bank-like entities are intertwining themselves. They are all blowing each other, in some very odd porno gangbang. We all have to hope they can come on the right faces and unwind themselves gracefully. Heaven help us if they can’t.
Read more: banking, credit default swaps, economy, wall street, Mr. Walker, Banking Porn
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23 Comments
Add your own1. Vrag Naroda | March 12th, 2009 at 1:18 pm
Sorry, but your description describing CDSes as insurance is absolutely wrong. An insurance on a bond would be a [monoline insurance] wrap, not a default swap.
The key difference is this – to take out an insurance contract, you have to have an “underlying interest”. I.e., for you to take out a car insurance, you must be the driver with the right to drive said vehicle. You cannot take out insurance on someone else’s car.
A swap allows you to assume the risk (selling protection) for a fee, or to bet on future damages (by buying protection) on an asset that you don’t own! This is the key difference.
So imagine if we had a Life Insurance Swap – with this I would be able to buy protection (i.e., synthetic life insurance) on the average life expectancy of 40+ year old males in Yakutsk to “hedge” potential income losses from killing my customers with my samogon operations in Yakutia.
You see the potential for abuse here?
2. Vrag Naroda | March 12th, 2009 at 1:29 pm
This description is inaccurate.
CDS is not an insurance on bonds. An insurance on a bond is called a monoline wrap.
A swap is not insurance, because insurance requires the insurance buyer to own or have an underlying interest. For example, you can only buy life insurance for you or your spouse, but not Mark Ames. This is to prevent moral hazards.
A swap removes this moral hazard, and indeed is a free market moral hazard play – which allows one party to to buy protection (sell risk) on something that he has no underlying interest in. The seller of protection takes on risk for a fee…
With a swap, I can happily buy a $10 million notional protection on Mark Ames, betting that he has pissed off enough conservative nuts that he’ll get offed one day.
How does this relate to business? Let’s say I own a samogon operation in Yakutia – and I’m afraid that the decrease in quality of my products are cause many of my customers to expire, I can buy a structured product, let’s say protection an index of life expectancy of 40+ year old males in Yakutsk.
Get it?
3. Gabe Newell | March 12th, 2009 at 1:43 pm
One important difference between credit default swaps and traditonal insurance is that the latter have collateral requirements that the former don’t, which is how AIG got it self into the position of not being able to pay off.
AIG was also treating their credit default swap obligations as being much more uncorrelated than they were. For insurance this is plausible – my house burning down in Seattle doesn’t increase the likelihood of your house burning down in New Jersey. For bond defaults it’s usually kinda plausible until it isn’t – until you have a system-wide downturn and AIG gets wiped out. Treating bond defaults as uncorrelated is a way to have several great quarters in a row and then have one quarter where you lose everything you made and a bunch more (which works out just fine for the traders, but not so much to your equity holders).
4. Fast Fred | March 12th, 2009 at 1:50 pm
Every issue, there are Exile stories about class warfare in America and the demise of capitalism.
There has never been a more successful economic system than capitalism in the history of the human race, not only in creating a huge middle class in America but in creating social justice for the underclass. There is no freedom without economic freedom and it seems like only yesterday that the Exile was forced into exile by the Russian government.
Your staff may believe in socialism but you voted with your feet. I think you also forgot about real class warfare in the Russian revolution.
Please send me jpegs of Hannah Katz’s and Mark Ames sister’s snappers.
5. Tony | March 12th, 2009 at 3:04 pm
You’re correct:
If a person knows a bit about the history of US markets there are plenty of precedents for insane confidence and equally insane fear.
Indeed, upheaval and collapse is the rule rather than the exception in American economic history. Panic of 1907? Crime of ’73? Mr Jackson’s quarrel with Mr Biddle?
The list goes on and on.
The problem these days is globalization and interdependence of markets. If Wall Street catches a cold, so many other places come down with terminal cancer.
6. Allen | March 12th, 2009 at 4:22 pm
FF: Milton Friedman, is that you?
Okay, put the Ouija board away. It’s time to let the old man have a peaceful afterlife already.
… I mean can’t a sneeringly condescending old magician of ideological-hackery be allowed to be dead in peace? When his work is done and he’s finally a corpse? “Treated like a discardable peace of machinery today? Life ruined in order to enrich the shareholders and corporate pay-bosses? Wha. That’s Capitalism my friend. Now watch me pull FREEDOM outta my hat!”
7. 16 Shells from a 30.06 | March 12th, 2009 at 7:16 pm
CDS’s (Credit Default Swaps) should be should be regulated…
by state gambling/lottery commissions.
They have no place in the market.
8. wengler | March 13th, 2009 at 4:17 am
Fast Fred, unregulated capitalism died in 1933. The US didn’t have a middle class then, at least not one that looked anything like it does now. Capitalism might have been a good idea when settling a country, but then again the US has constructed economic barriers until late in the 20th century, so that argument is somewhat null and void too.
In conclusion, capitalism only worked well for rich British assholes sucking out resources from their colonies. The American version just went into epic fail as popular resource-sucking region Latin America has about two American-aligned leaders left, and Asia and Saudi Arabia having the nuclear option on US currency.
What’s most likely going to happen when politicians start pushing austerity measures through like we were some IMF-controlled banana republic is somebody’s going to come along and say “look over there!” If they are smart they won’t go after some country that can really do some damage, but it will likely be attack Cuba or attack Iran or some shit.
States will defeat capitalism because it’s a dirty joke that leads to monopolies and corruption. Anarchist socialism would be fine with me, but the ‘fuck you’ classes will probably destroy it cause they like smacking people around. Either that or they will never trust a system that can’t tell other people what to do through force.
9. Big O(rgan) | March 13th, 2009 at 11:14 am
These two Islamic Fatwudz just rec’d by semaphore from Cheney’s HGTV cave: 1) Brothers and Sisters, have a looksee at all the recent comments: eXiled has crossed the Rubicon of class war and is skirting the fringe of what my mind can take. . . and the readers find fault with the articles; as in – you got it wrong and don’t know what you’re talking about. 2) My mother put it right: “Please send me jpegs of your father’s gay lover’s anus.”
Forget idiots like me, eXiled! That’s not what earned you your chops. The readers deserve crap. The readers demand that I shuttup. The readers revel in exactly the opposite of what I revel in.
They, the readers, WANT NOTHING TO DO WITH ME!
10. Big O(rgan) | March 13th, 2009 at 2:51 pm
The comment attributed to me, the one, the only Big Organ) on March 13th, 2009 at 11:14 AM regarding ‘Banking Porn: The Blowjob Market By Mr. Walker’ was in fact written by me. The data was critical of my sad attempt to legitimize myself, rather than to simply kill myself, which I probably should. Maybe it’s my bad puns that makes me so talentless. SHould I give up the punning folks? Does anyone care?
11. Robert Clark III | March 13th, 2009 at 6:58 pm
Not remotely.
12. harv | March 14th, 2009 at 10:46 pm
dick chomper???
loooooooool
13. Fast Fred is Slow | March 15th, 2009 at 4:54 pm
Umm, the thing about Russia, is that Ames fled from censorship, because the KGB didn’t like Ames calling KGB Academy Graduates, “Slutty Whores”. This has nothing to do with Capitalism, Socialism, Communism, or any other economic ism out there. Ames’ banishment was for political, not economic reasons. Mark – what were you thinking?
The Roman Army thought that Imperialism was the best economic system out there, and after a few centuries, only too late, realized that Imperialism led to the Huns taking a liking of plundering Rome, as well as inner corruption, and there went the empire. No economic system ever, is the best. And if humanity fails to constantly improve its economic system, we will face World War III, game over. In the Middle Ages, Monarch and Usury was all the rage, and then we had slave trading, so economic systems evolve. Time to get with the times.
14. Palmer Eldritch | March 16th, 2009 at 1:05 am
Big O(rgan), are you the same guy as Good Celery from somewhere else? There can’t be that many people with that particular taste in humor and wordplay.
15. Michael | March 16th, 2009 at 2:04 pm
Technically the first two authors are right, the issue of an interest is important. But conceptually they are the same, especially for the man on the street.
Was it Liars Poker when a junior was going on a business trip and one of the seniors flipped a few hundred dollars and said “buy a life insurance with me as beneficiary” “why” asked the junior “I’m feeling lucky” came the reply from the cynical senior
But CDSs bring back moral hazard in another way, especially if they see that the policy is worth more than the house for example, holders may like you to burn the house down in order to be able to make a claim
16. Homer Erotic | March 18th, 2009 at 7:56 am
Vrag Naroda:
Another interesting thing about Credit Default Swaps I have learned is that as many people who want to can purchase one of these “insurance policies” on a debt-based “asset”. Using your example, that would be like all of us commenters here thinking, “Wow, that Mark Ames isn’t long for this world what with all the rednecks he’s pissed off. So if anyone can buy life insurance on his mortal existence and get paid handsomely once he buys the proverbial farm, I want in, too!” So, let’s say, 500 people have bought a very handsomely-paying policy on Mr. Ames’s mortal existence. So on, let’s say, Easter Sunday, he finally croaks, albeit from a massive cocaine overdose rather than some berserker redneck loser with a sawed-off shotgun. How does the agency that sold the policies come up with the moolah to pay all 500 of us??? Hello imminent bankruptcy!!!
17. Homer Erotic | March 18th, 2009 at 8:16 am
Fast Fred:
The big thing that made capitalism “successful”, insofar as its advocates measure success, was very cheap and very abundant fossil-fuel energy that made it possible to exploit much more effectively with fossil-fuel-powered machinery the resources of the planet. We are now entering the period in which the supply of these vital fuels is in decline while demand continues to increase. (Yes, there’s lots of coal, but most of what’s left is the crappier higher-pollution, lower-energy kind.) That has a lot to do with why the bills for Wall Street’s Ponzi schemes are coming due about now.
18. Hayek's Shadow | March 20th, 2009 at 6:40 am
Since the financial crisis, the bashing of capitalism has become all the rage. Yet we should not bash capitalism but rather Special-Interest politics in the US and the World.
The bankers were able to successfully lobby the Federal Government into casting a blind eye on the need for regulatory oversight of derivatives. Indeed, had proper oversight been made, derivatives would have been regulated by gaming commissions and not the SEC.
According to F.A. Hayek,Capitalism has evolved spontaneously, much like language, from traditions and morals somewhere between instinct and reason. [ the desire to “Fuck someone over” is an instinctual- the desire to help others unconditionally, altruism, is patently false because even the actor at the smallest collective group spurs others to action from alterior motive]. Millions of decisions are made daily regarding several property and capital goods by self-interest promoting actors. This spontaneous order allows for a prosperity and impersonal altruism. Indeed, we may not be happier, but we are generally much more prosperous than our predacessors 50 years before us.
It is a fatal conceit (a book by Hayek) for humans to believe that they can plan and control economic outputs to create common equality among mankind. I posit, in accordance with Hayek, that all outcomes are the results of human action, not human planning.
I challenge all of you to read “The Road to Serfdom” and “The Fatal Conceit” by Hayek. Perhaps then you will better understand the questions of POLITICAL ECONOMY.
Regards.
19. Krangk | March 20th, 2009 at 11:32 am
Hah, haaaa! Did you see the picture? Hah, haaa! Of the two guys? And they’re touching each other? Haa, haaaaa! That’s funny!
Oh yeah. Fine job Mr. Walker.
…no pun intended.
20. Homer Erotic | March 20th, 2009 at 2:45 pm
Hayek’s Shadow:
That to which you seem to be partial sounds like true libertarian capitalism, and if it were possible, it would be a vast improvement over crony-corporate oligarchism, even if your economic libertarian system had its own downside. The problem is, free-market ideology as promoted by the rich tends to lead to crony-coporate oligarchism in manner somewhat similar to the way revolutionary socialism tends to lead to communist-party dictatorship. Perfect libertarian capitalism may be a more realistic ideal than perfect Marxian socialism, and a crony-oligarchist capitalism may be preferable to communist dictatorship (communism really, really sucked bitter ass, as we all know), but there is still a certain amount of parallelism between the two sets of “ideal vs. reality”.
21. vvvci | March 20th, 2009 at 5:54 pm
Fast Fred is… well, slightly delusional. Like _anyone_ who trumpets “Capitalism!” as the new uber-god of humanity.
To begin with, as they say, “all history is geographical accident.” That is why the residents of a dismal, gloomy little island off the European Atlantic Coast grew to be the empire “the sun never sets on” – ferocious little bastards who endured and encompassed various waves of Roman, Anglo, Saxon, Dane, Swede, Norman, & other invaders, they evolved to become a “nation of shopkeepers” who with a little luck- (think Spanish armada destroyed by bad weather, or Napoleon not winning Waterloo) mangaged to keep their slavery (India opium cultivation) and drug-trade (opium war vs China) and outright genocide (“Great IRISH famine”, as if it was the Irish’s fault that grain crops were exported from the island at the height of the famine!) merchant-run empire (East India company) just one step ahead of the competition… aka what Fast Fred calls “Capitalism”!
Hey Fred – you call the Spanish conqusitador pillage & conquest of Central/South America “capitalism” too?
And don’t forget, if not for Stalin’s _slave_ armies (no one ever called Red Army conscripts “free”!) in WWII, we’d all be speaking the German brand of _national_ _socialism_. (Actually quite the opposite: state-sponsored corporate autocracy, but either way, it took Stalin’s Red Army to keep ’em from taking over the world.)
22. CSI | March 22nd, 2009 at 9:50 am
Why o why did Women’s Studies ever get accepted as a legitimate academic subject? Is covering gender relations in psychology and sociology not enough?
Women’s Studies courses are always taught by the most damaged females who try to turn everything into a control issue. If you ever hear the phrase “sex is all about power”, come out of someone, fucking RUN and don’t look back. Never date girls who buy into the course (MARRY the ones who admit to taking it just for an easy A and think it’s all bullshit).
And the woman below the man is the only blowjob position? Not only has that person never had good sex, they quite possibly have never had ANY sex, and only has access to the most boring porn.
23. Richard - Exeter UK | April 30th, 2010 at 10:39 am
I would suck on any guys cock if his in the suite and pay me for an hour to suck his dick even if he works for the KGB or anyone on wall street in London and what about that guy in the photo, I would do him.
If interested e.mail me.
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