This sounds like a great scam. Set up a corporation, guarantee a bunch of loans, use ALL the money to pay yourself and any clerks you employ, and if any of the loans default, just have the corporation declare bankruptcy. There's got to be a catch, here...

When Long Term Capital Management Fund suddenly had

to pay back more money than it could hope to raise, when

its derivative positions went bad, didn't Greenspan launc

a Fast Panic effort to get a bunch of banks to buy LTCM's

positions at a loss, in order to stop the whole derivative

system from self-destructing all over the economy?

Hasn't Warren Buffet called derivatives "weapons of

economic mass destruction?" Isn't he trying to close out

all derivative positions held by all his companies, and

taking whatever loss he has to take, in order to get

out of the La Brea Derivative Pit?

"Banks, theoretically, as institutions that are in the business of lending money, are theoretically the parties with the most experience in evaluating risk and credit worthiness. By selling off their exposure to other parties, they are also transferring the responsibility of evaluating risk to institutions that aren't in the same business. Why should a pension fund be an expert in whether that loan to a power company in Brazil is a good bet?"

Um, cuz pension funds have pension actuaries that actually understand risk, as opposed to bankers, who are trained to avoid it.

Banks cannot evaluate risk, they can only detect it. And usually, once they detect it, they either shun it, or find a way to off-load it. That is what they always do, and always have done. You have to look to the insurance and speculative (i.e. derivative) markets to find people who know how (and want) to evaluate, take on, and manage risk. Think about it, before we had mortgage backed securities, it was darn hard to get a mortgage. Why? Because banks are allergic to risk. Now that they can bundle them up and send them off to the derivative markets, they are much more comfortable issuing mortgages. This is but one example.

I suppose if it would make everyone feel better about those evil corporations we can go back to the days when one late bill payment meant you can't get a mortgage, but I kinda like my house.

Anonymous has some very good points. I would add that the big advantage here is that risk can, to some extent, be systematically reduced through these methods. A simple example is that a bank in the Detroit area could reduce the mortgage risk due to the ups and downs of the auto industry.

including a complete history of who came up with the idea (a group of twenty somethings on retreat getting drunk somewhere from Morgan Stanley Bank) about three weeks ago. Its worth checking out if you have access (story was in the weekend edition). The article talks alot about the darwinian evolution of finanicial products between all the banks as most finance models cannot be patented.

Sounds exactly like reinsurance to me. The insurance industry has been doing that forever. That way no company takes a single huge hit for large losses. If they did not do that, insurance companies would be going out of business every time a big hurricane hit.

If it is significantly different, I would like to know how.

This is completely off-topic, but I cannot restrain myself any longer.

The article says:

That's the simplest possible explanation. In the real world of credit derivatives complexity is exploding on an exponential scale.

I object to the current overuse of the adjective "exponential". It is very often sloppily used as a synonym for "very fast", even in instances when the growth under discussion is nowhere near exponential. Furthermore, if the exponent part of the growth is low, "exponential growth" can also be slow growth. See http://en.wikipedia.org/wiki/Exponential_growth.

While I'm on this little rant, here are a few other words that get my hair up when used incorrectly:

• Literally, when used to give emphasis to a figurative metaphor that is not, in fact, literal. This is just the worst, as there is no other word to take the place of "literally" if it suffers from inflation. Will people then have to write "really truly literally" or "literally literally" or "this-time-I-really-mean-it-literally"?
• Unique, exciting, and ultimate, most often abused by lazy advertisers, who cannot think of any other attributes for the products they flog.
• Disruptive, ubique, Web 2.0, and other buzzwords that are being used as the techie approximation of the previous list.

Do you have any other articles or info on credit derivatives pricing or trading? Been looking to find out more info on the player in the market... I've some interesting information on the following sites:

http://www.cawleyaxiomcds.com

http://www.cdsaxiomglobal.com

Know where I can find any additional info on the other players?