Going short on bonds by buying a Credit Default Swap ("CDS") contract carries limited risk but almost unlimited profit potential. By contrast, selling CDS offers limited profits but practically unlimited risks. This asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. The negative effect is reinforced by the fact that CDS are tradable and therefore tend to be priced as warrants, which can be sold at anytime, not as options, which would require an actual default to be cashed in.
--George Soros, "One Way to Stop Bear Raids"; The Wall Street
Journal (3/24/09)
Huh??
There's plenty of commentary out there already on the Treasury's new initiative to buy the big banks' toxic assets. So, I'm not going to add mine.
However, clearly the stock market (or at least Wall Street) loved it: it exploded to the upside yesterday, with the Dow Jones rallying 500 points, or about 7%.
Whatever the merits of Treasury's plan, one thing it is not is clear. Or simple.
Of course, neither are the problems it is attempting to address (Exhibit A is Soros' op-ed piece -- and hundreds more like it. If you're befuddled, Soros, a multi-billionaire and investing legend, is basically saying that flaws in the marketplace permited a "piling-on" phenomenon that led to the fall of financial giants like Lehman Brothers, Bear Stearns, and AIG).
And still . . . it seems like brain-numbing complexity isn't just symptomatic of the problem in the financial markets, it is the problem. Which means the cure is simplicity.
Put it this way: after witnessing the financial system crash so spectacularly, you'd think the first order of business would be to impose lower speed limits.
Posts
1 comment:
Did you know that George Soros would not be a billionaire, if it were not for the international language Esperanto?
The Forbes Rich List places Soros as the 28th most wealthy person in the World.
Born in Hungary in 1930 as Gyorgy Schwartz, the family changed its name in 1936 to Soros, which in Esperanto means "to soar" . The Soros name change was an effort to protect the Jewish family from the rise of fascist rulers and the whole family spoke Esperanto at home.
As a native Esperanto speaker, (someone who has spoken Esperanto from birth), George Soros defected to the West in 1946, while attending an Esperanto youth meeting in Berne, Switzerland.
Esperanto enabled Soros both to defect, and to become a billionaire.
Post a Comment