Risk Latte - “Manhattan project” again - who created the Credit Default Swaps bomb?

“Manhattan project” again - who created the Credit Default Swaps bomb?

Rahul Bhattacharya
February 15, 2009


At the House Financial Services Committee hearing last Thursday Congressman Michael Capuano, after having verbally lynched all eight CEOs of the banks assembled there asked them:

“Who was the brilliant person who came and said, ‘let’s do credit default swaps’, find him, fire him!”

Present in that group was Jamie Dimon, the CEO of J P Morgan. Mr Dimon should have known better. He once said “It was all about having the best systems, the best people, the best products, the best risk controls. It's all about being the best, the best, the best.”

In 1994, in one of those “off site weekends” of wild partying and some brain storming that became the mainstay of the investment bankers in the nineteen nineties and the two thousands, a 40 year old Managing Director of J.P. Morgan was ensconced in a Boca Raton Resort and Club in Florida along with a group of rocket scientists from the bank trying to figure out a complex problem. The problem was how a bank can protect itself from the risk of a customer defaulting on its loans and that man's name was Mark Brickell. The outcome of that weekend's brainstorming (and wild partying) was what we today know as the credit default swaps (CDS). That weekend ushered in the age of credit derivatives.

J.P. Morgan is credited with the development of the first credit default swap.

Between, probably, sipping pina coladas by the pool side and discussing the fine points about how interest rate and currency swaps work, these astronaut-turned-bankers figured out a simple solution to the problem of corporate debt default. And they thought that they have truly achieved something. It was as if they had finally assembled the atomic bomb.

And they definitely did. The destruction that the credit default swaps and other credit derivatives have rained on the investing landscape can be easily compared to the destruction of Hiroshima and Nagasaki and its aftermath.

Mark Brickell said that he felt like being part of Robert Oppenheimer’s team at Los Alamos in early forties working on the Manhattan project. Here’s what he said in a recent interview*

“I have known many people who worked on the Manhattan project. And for those of us on that trip, there was the same kind of feeling of being present at the creation of something incredibly important.”

So, it is Nobel Prize for Mark Brickell? How many more “Manhattan projects” would be needed to convince the world that we don't need an “atom bomb”, ever, either to destroy lives or wealth?


Reference: http://www.newsweek.com/id/161199*Newsweek Oct 6, 2008
http://money.cnn.com/magazines/fortune/fortune_archive/2006/04/03/8373068/index.htm

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