Wednesday, 19 November 2008

More awful journalism on credit derivatives

The ignorant journalist's favourite whipping boy, the CDS market, gets another undeserved beating today, this time from Alan Kohler in the Business Spectator. Managing a considerable density of mis-information, Mr. Kohler is rather histrionic:
As the world slips into recession, it is also on the brink of a synthetic CDO cataclysm
Would that be a cataclysm like the Lehman CDS one, or like the Fannie and Freddie one? How would sir like his non-event today?
The triggering of default on the trillions of dollars worth of synthetic CDOs that were sold before 2007 could be a disaster that tips the world from recession into depression. Nobody knows, but it won’t be a small event.
Or just perhaps it will be totally orderly just like all the other CDS settlements so far.
CDOs were invented by Michael Milken’s Drexel Burnham Lambert in the late 1980s
No, CMOs were invented by the Freddie Mac in 1983. The first CBOs were based on that structure.
About a decade later, a team working within JP Morgan Chase invented credit default swaps, which are contractual bets between two parties about whether a third party will default on its debt. In 2000 these were made legal
Again no. They were legal when they were first traded, in the early 1990s. (U.S. law, it may surprise Mr. Kohler to learn, is not the only relevant one.) At this point I have to confess I gave up. Anyone who makes that many basic errors in the first few paragraphs while using over-blown and emotive language does not deserve to be read.

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