“It’s alive!”

There was a paragraph in a Financial Times blog post about the Greek debt deal that really caught my eye this morning:

The [International Swaps and Derivatives Association] is important because they are the industry group which decides whether so-called credit default swaps – essentially insurance policies investors buy to protect them against a bond default – should be triggered. This is the “credit event” that European officials, particularly at the ECB and the French finance ministry, have been hoping to avoid.

The scary thing about CDSs is that nobody really knows who owns them. So if the ISDA rules they must be paid out, lots of financial institutions my suddenly find themselves with significant losses. It’s that kind of uncertainty that spooks the financial markets.

Seriously, how absurd is that? I thought the whole point of a CDS was to provide insurance against a “credit event” (a wonderful euphemism for a default) so that the pain would be spread around a bit more. But now it turns out that no one apparently imagined that these CDSs would ever have to be paid out, and the very idea that it could happen is “spooking” “the markets” (the poor dears) – which of course created the damn things in the first place. So in other words, what was originally meant as an insurance instrument is actually making the whole situation even worse.

This is an excellent example of how the last couple of decades of deregulation and globalisation have allowed the financial sector to burrow so far down in its own twisted logic that it couldn’t find its way out anymore, even if you gave it a map and a torchlight.

Or to think of it another way: The financial sector seems to have created a construction that, while appearing brilliant at first, has eventually revealed itself to be a monster that is beyond their control and will turn on not just its creators, but everyone else as well. Doesn’t that remind us of something? Something very… classic?


(Although to be fair, Frankenstein’s monster did have some redeeming traits. I’m not sure you can say the same thing about CDSs.)

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