Ok, I sort of get how we got to where we are in the credit markets. But after listening to an absolutely riveting hour of financial discussion on This American Life, I'm left with two questions:
- One of the failures of the markets was the ability to use CDSs as a financial instrument without owning the underlying asset. For example, Lehman issues a bond for $100 M. MS buys the bond. MS buys a CDS from AIG on the bond for 2% of the bond’s value. Goldman, in a speculation move, also buys a CDS on the bond for 2% of the value. Then Lehman starts looking shaky – six months ago or something. More people start to buy CDSs from AIG. Why didn’t the cost of the CDS go up proportionally with the risk. For example, if it’s 1 week prior to Lehman going bankrupt, and people are freaking out about them, why wouldn’t a CDS on their bond cost 98% of the bond’s worth? The podcast seemed to indicate that it was so many people taking out CDSs on bonds that they didn’t have any relation to, purely as speculation devices. But isn’t the market supposed to handle that?
- Another thing talked about during the podcast was the idea of netting out to hedge risk. AIG sells a CDS on Lehman’s bond to MS for 2%. Then they buy a CDS on Lehman’s bond from Wacovia for 1.98%. Then Wacovia buys a CDS on Lehman’s bond from the IMF for 2.01%. Then Wacovia goes under. The assets are still there, and the hedges are still there, correct? Meaning, yes, AIG may now take a 0.01% loss rather than a 0.02% gain… but surely they wouldn’t be considered to have a naked position, would they?
Anyone want to enlighten me?
[Update: Changed CDO to CDS as I was using the wrong acronym.]
Many people ask me what the heck I've been doing, since this blog seems to have gone a bit fallow, and I've left the company. Well, I've helped start up something new, what I will modestly call the greatest sound platform in history. But this is merely a day time job. My full time, night and day job is none other than to promote the use of the sound of this crow. I love it. I don't know why, but I do. My guess is that this crow, in crow-ese, is actually uttering hypnotic words that has weaved me deep into its warm embrace. Regardless, my mission is clear. If you're not listening to the crow, you're just not living.
I've had a theory for a long time that the bread you get before a meal is a perfect leading indicator to the quality of the restaurant. I have yet to be proven wrong by it. Sometimes I'm off by a little bit, but it's never been 100% off. I think it's just a great example of what it means when you've got a lot of the system working, but you haven't debugged the system completely.
Anyhow, last night we had dinner at a really nice restaurant: Gerard's. Food was very good, but the bread was TERRIBLE. I realized I'd really like to start writing this stuff down for future reference. Obviously, it's really subjective
Bread Rating: D-. Stale, hard, flavorless. Tasted like I was chewing on paste. Gross.
Food Rating: B+. I thought it was actually pretty good food, I had the filet. The steak was tasty, but not phenomenal. I was really looking for great taste and tender. The sides were mashed yams and were really sweet, almost overly so. There was way too much gravy. The dessert, which was a macaroon with coconut and pistachio was terrible as well... too dry and flavorless.
Net: The rating system holds... even at the nicest restaurant in Maui. Never lose sight of the small stuff, it'll always bring you down.
Just awesome! The last MST3K I saw live was about 10 years ago, and though I got some of the DVDs in the interim, I could not be more excited about this rebirth. And talk about a perfect medium for this... extremely passionate audiences willing to pay for content direct from the publisher is a perfect fit for CinematicTitanic (nee MST3K). Unfortunately, the licensing rights for 30 year old movies that are doing the studios exactly zero in business apparently is slowing the flow of this content to the web. You've got to be kidding me. Exactly what do these studios THINK is going to happen... a run on Joe Don Baker movies?
You know how I know that The Onion is one of, if not THE, best social commentary of all time? Because what they say is so close to the truth that it often becomes real: Bush 2004 Campaign Pledges To Restore Honor And Dignity To White House
Here's my question. If Bush DID run as the change agent, exactly who is on the other side of the change equation?