The Breakdown

Explaining Southern California's economy

Quote of the Week: Greek debt crisis edition

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I just discovered Tony Alfidi's blog and have been enjoying his uncensored views on a variety of tech and finance subjects. I agreed with him on Apple's mastery of planned obsolescence and now I'm tempted to agree with his verdict on credit default swaps (CDS) — a number of which just kicked in as Greece "defaulted" on some of its privately held sovereign dealt. 

Some people think that CDS, despite their role in the financial crisis (they brought down AIG), remain useful, as a means of hedging risk and as a relatively recent example of financial innovation that was sadly misused. 

Alfidi says un-uh:

I've always believed that credit default swaps are meaningless and even dangerous. [There's your Quote of the Week!] Banks and hedge funds use them to place directional bets with no regard for a counterparty's solvency. The European versions of AIG, whoever they are, can now breathe easier for a few weeks knowing they can get away with more uncapitalized CDS writing.

Alfidi is on to something with his point that CDS are "meaningless." For whatever reason, I haven't heard this claim made so overtly. CDS are effectively "meta-finance" — they exist at the level of contemplated catastrophe and are traded based on calculations and re-calculations of risk. Obviously, they only actually do anything is when, for example, Greek defaults on some private debt and the contract pays out. The rest of the time that provide speculaltive information to traders to, you know, trade on. It rightly seems to irk Alfidi than the European AIGs can continue to issue this meaninglessness without putting any actual money at stake.

Maybe it's because I'm getting older, but trafficking in these derivatives, even if it's a potentially useful part of the banking system, strikes me as a far cry from what financial markets should be doing. It might be a good business, but is it really good for business? One thing's for sure: derivatives like CDS haven't been all that great for Greece.

Follow Matthew DeBord and the DeBord Report on Twitter.

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