Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : GOPwinger Lies/Distortions/Omissions/Perversions of Truth -- Ignore unavailable to you. Want to Upgrade?

To: Lizzie Tudor who wrote (139357)	9/29/2008 9:13:07 PM
From: Kevin Rose	Respond to of 173976

Yes, someone in the risk management wheelhouse was asleep. Well, maybe a LOT of people. Insurance companies spread their risk by writing policies in different regions, and avoiding overwriting in any one area. This is smart, because it spreads the risk of a big event across insurance companies. But, it assumes that the risk of a major earthquake in California, a hurricane in the Gulf, and a major ice storm in the Northwest all happening at the same time are very low. The problem with the CDSs were that no one realized that the whole country is at risk - not of a geological or meteorological event, but an economic one. So, instead of spreading the risk, it interconnected every financial institution to the risk associated with an economic explosion. The risk was actually still there, and in fact increased, because of this interconnection. Subprime mortgages provided the fuse, but the explosives consisted of these CDSs. When it went off, some major players did not have the assets to fulfill their guarantees, and the dominoes started to fall. Failing to understand that spreading of risk was a bad thing in this case is what has caused this mess we're in.