Credit-default swaps, I think, have serious problems associated with them.
If you pay attention to where your exposures are, you might tend up buying credit default swaps against a variety of people that you - companies that you deal with.
Countries are not like financial markets. Social change cannot be executed as swiftly as credit-default swaps. You cannot sell short on social commitments and practical responsibilities.
I do believe CDSs [credit default swaps] have been miscast, much as poor workmen tend to blame their tools.
A credit default swap was confusing mainly because it wasn't really a swap at all. It was an insurance policy, typically on a corporate bond, with semiannual premium payments and a fixed term.
So what is the role that credit default swaps can play in an economy? Well my feeling is that if these things actually will now be traded on either exchanges or some kind of central clearing, they are going to be a very good measure of the credit worthiness of different companies.
Credit default swap gives you something to do. You can buy some credit default swaps from them to protect yourself against the bankruptcy of people who owe you money.
I mean, we've always had gold bugs, but now we sort of realize that Treasure Bills might be in the same category. And we have derivatives like credit default swaps which are in this category, and we have derivatives like volatilities that are actually an asset class that we can invest in which are now - would out perform if we have another financial crisis.
I think the credit default swaps can take the place of the rating agencies who really have missed the ball in this procedure and are quite conflicted by the way the ratings are paid for. So, I would like to see credit default swaps become an evermore important way of understanding credit risk in the economy.
The money has to be deferred with what they call "clawback," which means they can get it back if I lose it all. So that guy making ten million a year selling credit default swaps, if we're going to keep five million of it in escrow for ten years, and with the right to go back and get it, if he starts losing money, then we're going to give people the right incentives not too take so much risk.
As the financial experts all over the world use machines to unwind Gordian knots of financial arrangements so complex that only machines can make - 'derive' - and trade them, we have to wonder: Are we living in a bad sci-fi movie? Is the Matrix made of credit default swaps?
The people who did the collateralized mortgage obligations, sold them to pension funds, then sold them short, then bought credit default swap insurance on them, are just amazing. They are a law unto themselves.
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