This is the beginning, the first post in a pressing occasional series takng a look at the biggest unregulated form of Insurance in the World, the "Credit Default Swap" or "CDS".
The current credit crisis is a financial failure. It is not the result of unavoidable events like lightning and thunder. It is not the result of negligence alone, either. It is instead the result of a combination of unrecognized ignorance and recklessness.
The most horrifying thing about this currently cascading failure, aside from the fact that it seems to continually get only worse, not better, is that it is being addressed with the same combination of ignorance and recklessness that brought failure in the first place.
Through ignorance or intentional disregard of Risk, Reserves and Accounting Regulations some people profited enormously for a short time from Credit Default Swaps or CDS's. These people did not correctly calculate nor manage the Risk of CDS's. They intentionally rejected the need for Reserves to back up the obligation of any CDS. And they manipulated Accounting Regulations after the risk taken on CDS's was transferred to third parties in theory, though not in reality.
This is the first post in a series that will take a hard look at CDS's and their role as the biggest unregulated "Insurance" in the world since they were made for the first time in 1994. See also Matthew Philips, "The Monster That Ate Wall Street/How 'Credit Default Swaps'--An Insurance Against Bad Loans--Turned From A Smart Bet Into A Killer" (Newsweek, October 6, 2008); "Securitization," encyclopedia entry on Wikipedia.org.
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