FINANCIAL MISCONDUCT: Credit Default Swaps 2 – Financial weapons of mass destruction.

Steve Lombardi

Attorney
(866) 735-1102 Ext 335

0 CommentsPrint ArticleSubscribe

Developing your understanding of credit markets and financial weapons of mass destruction.

Yesterday we posted part one of credit default swaps. Today we talk about why they were described by Warren Buffet as financial weapons of mass destruction. Warren Buffet is associated with Berkshire Hathaway.

Who writes CDS’s?

Banks, pensions, insurance companies and even hedge funds write credit default swaps.

So where did our pension funds err?

Pension funds aren’t supposed to invest in anything that is less than a stellar investment with low risk. The corporations insuring the credit defaults assumed not every loan insured could possibly go into default.

Credit Default Swaps were bought and sold by and to hedge funds and other financial institutions. Financial institutions were betting on whether or not any borrowing corporation would default. Sort of like betting on what the weather will be tomorrow. It’s a giant investment shell game or better yet, a game of Russian default roulette. Everyone involved got nervous and started hedging their bets. In other words those involved in the financial markets all knew something was going to happen and that if it went bad it was going to be really bad for America.

How do we fix the markets in the future?

It's difficult for me to say, but here are a few ideas. We make those underwriting the debt own the debt. We make all those involved in the financial markets make complete disclosures to rating agencies.

Ratings Issue