A lot has been said about the Credit Default Swaps and the derivatives. These instruments are seen as major villains in the current melt-down. It is easy to keep denouncing the instruments without properly and objectively understanding the causes that led to the issues because of them. For, without dispassionate analysis, one could proverbially "throw the baby with the water out of the bath tub"! So what are Credit Default Swaps? As the need for higher and higher interest rates on bonds grew so also was the preponderance of corporates willing to issue debt for higher interest rates. This was also so because companies from countries that did not have good sovereign ratings entered the global business and wanted to compete. It was, therefore, in a sense the instrument that was creating the "level playing field". Although these companies were offering higher rates, their credit-worthiness was suspect at times - specially given their lower credit ratings (diminished by lower sovereign debt or other factors). So, the debt or bond investors wanted an insurance that such companies would indeed have enough money to pay them the interest. Thus arose a need to insure the debt interest. On one side of the transaction was this investor in the bond and on the other?? It was basically a speculator, who would speculate on the health of the company itself. While equity models were good to understand how a company is going to grow and thrive, at times they were not as well tuned to know if a company would be able to pay off its creditors. CDS is a required instrument for spreading risk. In fact.. critical. If the market had remained controlled and had a clearing house as well as the investments done based on positions in underlying debt, then the things would not have spiralled out of hand. Read more

Just wanted to take a look at the economy. Last month 240,000 more jobs were lost taking the total jobless to 10 million or 6.5%. And most are still awaiting news of more disaster from General Motors and Ford who have seen rise in losses. Until now at least the Government has not come out in support of the car makers with the bail-out money. If that is how it continues then there could be serious issues going forward. Meanwhile regulators have shut down Houston-based Franklin Bank and Security Pacific Bank in Los Angeles on Friday, bringing the number of failures of federally insured banks this year to 19. Read more