Way back on page c3 of today's WSJ we have a headline "Controlling Swap's Risk is Still Vexing". These are credit default swaps, a crude kind of bond insurance. The buyer pays money, the issuer promises to pay up if so-and-so defaults on his bonds. This is the security that last year, destroyed AIG, largest insurance company in the world.
The real problem with "swaps" is that all they do is sooth nervous bean counters on Wall St. The bean counter can buy securities from risky or walking dead companies, and tell his boss, "It's OK, it's insured." A good deal of money that could be financing real economic growth is siphoned off to placate bosses. When the market crashes, the swaps become useless because the issuers go broke before paying off the claims.
But Wall St loves them. According to the writer all will be well after a central clearing house for swaps is constructed. Good luck on that one.
Then there is this:
" Many financial institutions that are large sellers of credit protection are themselves facing crises of investor confidence. That's limiting swap trades in the broader markets because hedge funds and dealers don't know if the can count on their counterparties to provide the protection they need."
Well. Sounds like some of the Wall St suckers are finally wising up.
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