In the aftermath of the financial crisis, the finger of blame has been pointed in many directions, but one sector to really feel the heat has been credit markets. However, as David Wigan finds, this has provided an opportunity for innovators.
Warren Buffett, in his now infamous "weapons of mass
destruction letter" presciently warned that the explosion of
credit default swaps had "concentrated risk in the hands of
relatively few dealers, which can trigger serious systemic
Less than a decade later his dire prediction was realised. The
timebomb at the heart of the financial system was the credit
default swap (CDS). The CDS market began life as a quant
project in the mid-1990s and in less than a decade later had
grown into a $50 trillion global industry. Traded
over-the-counter and flexible enough to be packaged for any
credit exposure the default swap was the little blue pill which
made any loan feel good.
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