I m not sure one can still say

away vastly more in bad real estate deals than they’ll ever lose on their derivatives portfolios. Now that we ve gotten to a world in which derivatives and real estate deals are inextricably entwined,I m not sure one can still say that with confidence. But it s worth pondering as we move on to argument #2, which is that the CDS market is a giant house of cards whose collapse could bury us all. The results of the Lehman auction would seem to indicate that it s a sturdier structure than many had thought. But it s possible that the bankruptcy of AIG would have been much, much worse since it was a big seller of CDSes that is, a big writer of insurance policies. The simple truth is that we just don t know. That ought to be reason enough for us to move toward an organized, transparent CDS exchange that would presumably make such questions easier to answer. But it also makes it impossible to say with much confidence whether credit default swaps are financial weapons of mass destruction or not. Collateralized debt obligations now those are definitely financial weapons of mass destruction. CDSes, not so sure. Oh, and one other thing about that Lehman auction. Lots of usa prog people throw around the $54.6 trillion notional value of CDSes outstanding as an indication of the money at risk, but it really is not, as lots of the contracts cancel each other out. The notional value of the Lehman swaps was $400 billion. The money that actually changed hands in settling them was estimated at $6 billion. Apply that same ratio to the $54.6 trillion and you get $818 billion. Which is a lot, but to go back to Merton u581 Miller probably less than banks have lost on real estate. There is a complication, though: If lots of swap counterparties fail, as Steve Hsu explains, the losses can climb toward the notional value. So are credit default swaps the No. 1 cause of our current financial crisis? Really, I don t know. I do know that my head now hurts. Update: Nokia has agreed a deal with its banks in which the interest it pays on loans varies