Wednesday, April 01, 2009

Rolling Stone on this generation's great crisis...

"In its simplest form, a CDS is just a bet on an outcome. Say Bank A writes a million-dollar mortgage to the Pope for a town house in the West Village. Bank A wants to hedge its mortgage risk in case the Pope can't make his monthly payments, so it buys CDS protection from Bank B, wherein it agrees to pay Bank B a premium of $1,000 a month for five years. In return, Bank B agrees to pay Bank A the full million-dollar value of the Pope's mortgage if he defaults. In theory, Bank A is covered if the Pope goes on a meth binge and loses his job."

It's the best analysis I've ever read on where and how the mess began. And it's written so well, even I made sense of most of what was written. Give it a read. It's long, but well worth it (and it will make you more than a little mad at Obama's team).

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