International Swaps and Derivatives Association, Inc.

By sinde on October 7th, 2008


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For a closer look at this non-regulated organization, please visit the International Swaps and Derivatives Association, Inc. website.

Most of us never thought that the words “SWAPS” and “DERIVATIVES” could contain so much greed, fraud, and downright evil. But, in the context of finance those two words are the root cause of our near economic collapse.

The video above from the CBS program “60 Minutes” will show you the double talk Wall Street is doing in an attempt to sleaze out from under the scrutiny of the public.

The ISDA specifically designed “swaps” to look like insurance, act like insurance, to “insure” derivatives, yet, by calling the instrument or concept a “swap” rather than an insurance policy, the ISDA and all the “swaps” it handled escaped the regulation of insurance companies and policies. By doing so, the creators of these “swaps” did not have the capital reserves insurance companies are required to maintain.

In short, without any regulation “derivatives” were created. These “derivatives” were cut up bits and pieces of subprime mortgages that were put together in a package or as a “security.” Knowing that these “derivatives” were in all probability not going to be worth the paper they were written on, the market needed some hype to sell the “derivatives.” “Swaps” were created to fill the hype.

In short, here’s how it goes.

I have a bunch of subprime mortgages that will probably go into default once the interest rates jump up. I pick a few of the better ones and a lot of the ones almost sure to go into default and put them together and call that pile of poop a “derivative.”

I try to sell the product, the “derivative.”

Some buyers are skeptical of the mixture of subprime mortgages. That makes the “derivatives” hard to sell.

To give the potential buyers incentive to buy these “derivatives” another seller creates a package and calls it a “swap.” The “swap” is the guarantee (supposedly the insurance) on the “derivatives.”

The seller sells the “derivatives” to a buyer.

Another group sells the “swap” to the buyer.

Both sellers make money off the buyers.

If the “derivative” defaults, supposedly the “swap” (the guarantee) will pay off.

Unfortunately, the “derivatives” were suspect, and the “swaps” were paper with lots of words, but had no financial backing.

The derivative seller made money.

The swap seller made money.

The buyers lost money on both instruments.

The bottom line: Derivatives and Swaps were the ultimate con-game allowed by deregulation of the financial markets.

I suppose we should rely on the “honor system” on Wall Street, but as we have all seen there is no honor among thieves.

Categories: Opinion, The Issues
Tags: derivatives, ISDA, swaps, Wall Street bailout