A Nickel Ain't Worth a Dime no More

The Great Recession reeducks, a place where we will all have to work like a dog in order to live like one:

The NYT has a major article on risk and particularly the now infamous Credit Default Swaps, them things that, to quote the article:

sellers of C.D.S.'s spent years raking in premiums while underestimating or simply ignoring the possibility of rising defaults. Regulators let the market grow unchecked.

The piece is very good and (for once) easy to understand. The only problem with it is that it leaves out the fact that so many of these "insurance issuers" had no money to back up their policies. Back when I used to pitch risk to clients and prospective clients I broke it down this way: Suppose you are walking a tight rope 100 feet above a concrete floor. Then suppose you are walking the same tight rope three feet above a net. Which has the least risk.....the trick here is "risk of what?" The odds of falling off the rope from either 100' or three feet are exactly the same, but it is the sudden stop should you fall that must govern your judgement. But, in the current debacle nobody knew they were walking a tight rope. Most thought they were in something safe as T-Bills. But when they actually fell off it was 100 feet to a concrete floor.

Determining the exact risk is never possible. Perfect hedging is not possible, especially in a market where the bond rating companies lied, the brokers lied, and the market was corrupt at its core.