Monday, October 20, 2008

Anti-Witch Hunt Episode II

In this video I talk about the non-responsiblity of Credit Default Swaps for the financial crisis. The AG for NY and the US Attorney for the Southern District today announced an investigation into the CDS market as they think it is the root cause of the financial crisis. This is like blaming your TV for the bad news you see on it. While its true that if you did not have a TV you could not see the news, but that doesn't mean the news didn't happen. It just means you didn't know it. And certainly the TV didn't cause the news, it reports the news. And so it is with CDS. Lehman went bust because the value of its assets declined below the value of its liabilities and its equity because its management thought conditions would improve and so did not liquidate troubled assets at fire sale prices as Merril and others did. In the event conditions did not improve and so the value of Lehman's assets declined to a point where in liquidation the bondholders got $0.08 on the $1 and the stockholders got nothing. The rumors of the weakness of the assets of Lehman were true, but were not made true by people betting on their truth.

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