I just finished watching 60 Minutes’ latest piece on the financial crisis.  The focus was mostly on credit default swaps (CDS) and why and how they caused most of the problems in the financial markets.  I still think the best description I’ve heard of the role CDS’s play in the grand scheme of things is something I heard at the Frost & Sullivan event in San Francisco a couple of weeks back.  It was part of a presentation by James Anderson, President of SVB Analytics (SVB stands for Silicon Valley Bank) and I think it’s good enough that I want to post it again here:

Credit default swaps: Think of the market as a $1
million Texas Hold ‘Em game being held in a Vegas casino with a room
full of spectators.  All of the spectators start placing side bets on
which player will win, and eventually the amount of money in the side
betting is $70 million vs. the $1 million that’s at stake in the actual
game.  Credit default swaps are the side bets.

BTW, one of the people interviewed in the 60 Minutes piece said that the CDS "shadow market" is estimated at somewhere between $50-60 trillion, but that estimate is based on information garnered from a voluntary survey.  Since the CDS market is unregulated no one really knows for sure exactly how big the market is, which of course is scary as hell.

Finally, I need to tip my hat to Fec.  I first heard of credit default swaps when he started looking into them earlier this year. Here’s a link to the 9 (so far) posts that he has on the subject, beginning in January, 2008.