Thursday, October 9, 2008

60 minutes on credit default swaps

A professor showed this video in class last night, and I thought I should share it. I wasn't quite aware of how involved credit default swaps were with the whole economic mess right now. I knew that it was a big part of what took down AIG, but according to this report it was also a big part of Bear Stearns and Lehman. This is a $50-$60 trillion dollar industry, that is totally unregulated.

The video probably goes too far and basically lays the entire crisis on credit default swaps. I'm certainly no expert, and I'm still trying to get my head around everything going on. I do feel okay saying that the involvement of credit default swaps was a bigger factor than Fannie Mae or Freddie Mac, or the CRA.

You are free to consider and discard this as the liberal position, of course, but I found the report very informative. Remember, I first saw this in business school, not exactly a bastion of liberalism.


  1. "You can't model human behavior with math." Awesome!

    Thanks for sharing.

  2. this crisis is a black swan for sure. my take is that the cds contracts turned this into a nuclear explosion when it could have been a very big conventional bomb (pardon the metaphor.)

    that being said all of this comes back to a very bad idea which is you can somehow loan lots of money to people that have proven they won't pay little amounts of money back and magically make it work out.

    this is the silly idea that fan and fred are guilty of promoting in my book and the expansion of the cra in the mid-nineties triggered.

    bernanke lit the match though when he raised rates.

    sigh. enough blame to go around i suppose.

    the line james pointed out is so true. over and over and over it is proven that human behaviour is the most complex system of all and can't come close to being predicted with any kind of formula.


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