Audio available in app
Banks mask risk through complex financial instruments from "summary" of The Big Short: Inside the Doomsday Machine (movie tie-in) by Michael Lewis
Banks had many ways to disguise risk. They could, for example, buy insurance on the bonds they owned. If the bonds defaulted, the insurer would pay up. Thus, the risk appeared to be elsewhere, with the insurer, rather than with the bank. This kind of insurance was known as a credit default swap. It was not an insurance policy in the traditional sense of the term. It was a bet. A hedge fund could, for example, buy insurance on a bond it did not own. If the bond defaulted, the hedge fund would collect many times the amount of the insurance policy. The banks created a market for these bets. They made the bets so complicated that the people who bought them didn't fully understand the risks they were taking. The people who sold the bets didn't fully understand the risks either. The complexity of these bets made it difficult to assess the true level of risk in the financial system. It was like a game of pass-the-parcel, with the music playing l...
Similar Posts
Understanding financial statements is key to evaluating a company's performance
To truly grasp a company's performance, one must delve into the realm of financial statements. These documents serve as the pul...
Financial markets allocate the economy's saving to investment
Financial markets play a crucial role in the economy by connecting those who want to save with those who want to invest. When i...
Asset prices can have implications for the broader economy
One key aspect to consider in the field of economics is the relationship between asset prices and the overall economy. Asset pr...
Institutions such as banks and investment firms facilitate the flow of funds
Institutions such as banks and investment firms play a crucial role in the financial system by facilitating the flow of funds. ...
Understanding foreign exchange markets is essential for international investors
To effectively navigate the global financial landscape, international investors must have a solid grasp of foreign exchange mar...
Economic inequality poses challenges for policymakers
Economic inequality is a pressing issue that policymakers must address, as it presents a multitude of challenges that can have ...
The financial system is interconnected and complex
The complexity and interconnectedness of the financial system are evident in the multitude of relationships and transactions th...
Financial globalization has implications for domestic policy
Financial globalization refers to the increasing integration of financial markets across countries, allowing for the free flow ...
Regulatory shortcomings
The failures of regulatory oversight were glaringly evident during the financial crisis of 2008. The very institutions that wer...