Leading Credit Default Swap Trader: Justifications for CDS are Phony

Leading derivatives trader and expert Satiyajit Das wrote a must-read article today pointing out the falsity of the justifications used by both buyers and sellers of credit default swaps and other complex forms of “financial innovation”.

Here’s the most important excerpt:

The unpalatable reality that very few, self interested industry participants are prepared to admit is that much of what passed for financial innovation was specifically designed to conceal risk, obfuscate investors and reduce transparency. The process was entirely deliberate. Efficiency and transparency are not consistent with the high profit margins that are much sought after on Wall Street. Financial products need to be opaque and priced inefficiently to produce excessive profits or economic rents.

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  • I worked for 2 years on the trading floor of Citi in Tokyo and can tell you definitively that the average net profit day-to-day from the 53 traders was a grand total of about $5000. Not enough to cover the insurance on their collective Ferraris… All the money made was from the usury interest rates (@26%) charged on all the credit cards belonging to unwitting office ladies and other “small people”. The FOREX/Treasury/Etc. floors were just there for show and to prove that Citi was a full services bank.

  • A more appropriate phrase than ‘excessive profits’ is ‘illegal profits.’