[thechat] people who work weekends: a rant

[Matt Warden]

On Mon, Nov 3, 2008 at 10:16 PM, Judah McAuley <judah at wiredotter.com> wrote:
> Correction: the CDS (and other derivatives) were not low risk, they
> were of unknown risk. And that's the problem.

The point I was making is that if there is x% of the company losing
money and y% of that x% results in so much of a loss that the
government will rescue the company, then the risk involved in the
investment is less than x%. If there's a particular risk/reward ratio
with an investment and then you reduce the risk through government
intervention, you can't turn around and blame industry for
participating more in that investment than they would have without the
government intervention.

CDS are used to hedge risk. The risk you might be talking about with
CDS is systematic, where if the "insurer" defaults as well as the
hedged company, obviously the insurer cannot honor the swap, and then
that may trigger a "spidering" effect through other CDS transactions.
With regard to not understanding the risk, are you talking about
securitized mortgages, where it was not clear how risky the underlying
mortgages themselves are? I have not heard much talk about banks and
investors not understanding the risk with CDS as much as with
securitized mortgages.


-- 
Matt Warden
Cincinnati, OH, USA
http://mattwarden.com


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