Skip to main content

McAdams On: Financial Perversions

My understanding of credit default swaps was elevated recently by Richard Morgan. We’ve all heard about them in the histrionic babble about why the economy caved in like a cold flan, but Morgan provides a very black-and-white account of how CDS vehicles are like Pete Rose betting against his own team. They were initially developed to protect banks from loan defaults, but the raison d’etre eventually tipped to investors betting that borrowers would default. Morgan wrote in The Deal that CDS investments now total around $42 trillion, while the bonds they’re intended to cover total $25 trillion.

That’s another $25 trillion hanging in the balance in what’s left of the economy, and another $42 trillion for which some bank is probably going to go begging taxpayers.

It’s not as if there were no warnings. Warren Buffet denounced them seven years ago as “financial weapons of mass destruction.” George Soros, the billionaire hedge-fund manager known for his rather thrifty ways, more recently called for a ban on credit default swaps.

“It’s like buying life insurance on someone else’s life and owning a license to kill,” The Independentiquoted Soros saying at a meeting in Beijing. Soros and others have blamed credit default swaps on bringing down AIG, among others. AIG in turn whinged nearly $132 billion out of taxpayers, then went golfing.

Credit default swaps now have Gannett walking the plank, according to Morgan. That, and the fact that the media company borrowed up to its nostrils to buy back its own stock as the newspaper business dematerialized. Between Kindle and organic light-emitting diode technology, what used to be newspapers and magazines will become touch-screen, fibrous hankies that continually download news from News Corp., which will be the only actual news operation left standing.

And there will be no stories about News Corp. And none about Gannett, either, because instead of investing in magic news hankies, Gannett’s revenues will get sucked up by interest payments until its investors pull the trigger and collect on their credit default swaps.