Where the 1% work.

I want to arm you against Tea Party arguments that suggest government rather than unchecked, runaway capitalism on Wall Street created the economic mess we’re in and that, instead, the financial industry must be regulated to prevent an even worse economic meltdown.

In a recent book review in this space, I wrote about Wall Street’s flimflam artists whose poisonous Credit Swap Derivatives (“CSDs”) in sub-prime mortgage instruments almost destroyed the U.S. financial system and led to the Great Recession of 2008. I also told you how the same charlatans–whose Too Big To Fall banks (rescued with public money)–are engaging in the same flimflam rather than making loans to Americans and businesses to get the economy moving again. And how their debts could exceed the revenues of the entire U.S. government and lead us into a Greece-like debacle.

Now I want to plainly explain how these nefarious, secret, and largely unregulated CDSs work. So that you can keep your friends from being hoodwinked by Tea Party Republicans who pretend that Government is the major economic problem we must slay–rather than runaway capitalism without government oversight to protect us. I’m talking here about capitalism riding a chariot of greed, creating a bubble economy that makes nothing of value except exorbitant wealth for the 1 percent. Unbridled capitalism which doesn’t give the sweat off its nose about you or me or the economy or the 99 percent. So, pay attention, children and you will hear about the midnight ride of Wall Street, the Black Marketeer.

If we don’t understand this so we can articulate it, we’ll be tongue-tied and the bad guys will win. Then the idea of an America for the 99%, while never perfectly so, will be pulverized for good.

So, then, just what exactly is a Credit Default Swap?

The explanation is quite simple. Let’s say I buy a corporate bond from Corporation A. I buy this bond because I think the firm will make money and be able to pay me back with interest. However, there is still some risk that the company will default and the bond will be worthless. Therefore, I probably don’t want to risk that I will be left with nothing–so I buy insurance just in case Corporation A goes bankrupt.

So I call up Bank B to ask if it will sell me insurance on Corporation A’s bond. Bank B decides to do so for a 2% premium. So, I buy a $1 million bond and I pay Bank B $20,000 a year for insurance on the bond. If Corporation A goes bankrupt, I still collect my $1 million in insurance.

At this point this is no different than you buying fire insurance on your house. You pay your premium; if your house burns down, you insurer pays you off. A perfectly reasonable way to do business, right? But unlike fire insurance, what if I don’t have to actually own the asset in order to insure it? Now we’re getting into credit default swaps.

For example, Continue reading