Visualize, if you can, a picture of the capital building and under it; the words of Obi-Wan Kenobi, "You'll not find a more wretched hive of scum and villainy". The one thing Congress could do to put an end to this mess, is the one thing they will not do; lower taxes across the board and let some of the noxious gas out this bloated government.

'the only real WMDs are re-insurance and derivatives' Buffet was right again.

CDS's purport to be insurance, but they don't qualify as "insurable risks" according to Insurance 101. The state insurance department refused to oversee them. This was a mistake, because their job should have been not only to NOT supervise activities that are NOT insurance, but to intervene and prevent malfeasors from engaging in activites that purport to the public that they are insurance. That's why they call them "swaps", a rather crude name.

So the people who "invented" this product knew that they were in dangerous territory. To name names:Maurice Greenberg of AIG. Insurance cannot insure "catastrophic" risks (the usual example is War),which is what mortgage CDO's are, because the only time that these coverages would be tapped
would be in a meltdown, when it wouldn't matter, as we have seen, because the government would bail them out.

Another point working against qualifying "CDS's as insurance is that you cannot insure financial risks. Mortgages are a financial risk. The only way to "insure" financial risks is to diversify. There are two outcomes to a financial risk: profit or loss. Insurance only pays for static losses. It does not pay profits. If you are going to back up a financial risk, surely you are NOT going to be just up for the losses and NOT for the gains. Please! Insurance eliminates the risk of the party who buys it. An investment creates the risk for the purchaser.

So, what I am saying is that the person(s) who wrote these coverages (CDS's) knew that they were stepping over the line. They would have learned this in their first week of Insurance 101. You learn what insurance is and what it is not.

This basically applies to all derivatives. They are smoke and mirrors-a shell game. You can spread the financial risk, but there has to be equal sharing of the benefits and losses in quota share proportion.

Because the creators of the CDO's had "insurance" (CDS's), they had a false sense of security that allowed them to write inordinate amounts of lousy mortgages. They didn't understand that their insurance wouldn't be any good when they needed it, because the only time they would need it would be when there was a catastrophe and the insurance couldn't pay.

Mr. Atkinson's post gets at the question "How does anyone know that he knows anything?"

Successful nquiry proceeds along the following lines: becoming aware of a problem, observation, partial description, conjectures leading to further observation, etc., until an adequate description has been formulated.

Descriptions of a small part of the full situation may be mistaken as the key to the whole process; e.g., when inquiry is understood as a beginning with a "well-formulated" hypothesis and then searching for evidence (which Mr. Atkinson refers to as spinning), or when logical deductions are emphasized.

AIER's research methodology is described in its book, "Useful Procedures of Inquiry."

http://www.aier.org/bookstore?page=shop.product_details&flypage=flypage_new.tpl&category_id=8&product_id=44

Chambers inquires whether derivatives in and of themselves are a problem. He makes a warranted assertion that derivatives have a useful function. Rating fraud may be a problem, but that issue is outside the scope of Chamber's inquiry.