Dylan Ratigan | Greedy Bastards Favorite Financial Innovation: The Swaps Market (Part 1)

rcwhalen's picture

Below is an interview I did this week as part of the Greedy Bastards series with Dylan Ratigan.  Enjoy -- Chris

Welcome to another episode of Greedy Bastards Antidote — a podcast series that zeroes in on “Greedy Bastardism” in our country, and highlights the people out there who are finding the “Antidotes.” Dylan will be talking to the heroes and the visionaries out there on the front lines of education, health care, the environment, trade, taxes, finance and government, all of whom are finding solutions to America’s biggest challenges — and doing it creatively and fearlessly.

This week, we’re focusing on the swaps market — not only to learn exactly what credit default swaps are, but why they’re one of the favorite financial products of Greedy Bastards. This is the one market that betrays every fundamental principal of American values — it is not transparent, it does not require collateral if you’re a AAA rated bank, and you can sell insurance globally on credit. This incentivizes clients to buy them by offering lower interest rates (and who doesn’t want that?)

To help define exactly what “swaps” are, we got to talk to someone who knows them inside and out — Christoper Whalen of Institutional Risk Analytics and author of the book Inflated: How Money and Debt Built the American Dream. You can chat with him on Twitter @rcwhalen.

What is a credit default swap? Here’s how Dylan explains it: “The credit default swap literally has that equivalency in which AAA rated financial institutions sell insurance, so to speak, on credit—they allow you to reduce your interest rates, they allow companies and countries and individuals to benefit from, in the short term, reduced borrowing costs because of the insurance that was purchased in the swap, as they like to call it.” These are not transparent, because they are not traded on any public exchange. Lack of transparency means that no one, exactly, knows where the risk is or how much risk there is.

Why do Greedy Bastards love swaps? Dylan explains it this way. “The genius of the Greedy Bastards maneuvering in the swaps market is the following: After collecting the revenue for all the insurance that you’re selling and all the credit and debt of the world—by the way, the more debt there is, the more insurance you can sell—when the insurance claims come from default on that credit, you don’t have to pay a penny because you, my friend, are too big to fail,” says Dylan. “This is a market that has been created to basically protect the profitability of these banks that could be put on exchange but the barrier to doing it is the threat to their profits and the ability to do that is from money and politics.”

What’s an example of how a credit default swap functions? Chris Whalen provides this example:

When JPMorgan does a credit default swap with a customer, they keep the collateral. There is no separate trust company that is part of the exchange that holds all the money the way you do in a good poker game.

So nobody knows if it’s fully collateralized or not because they’re trusting JPMorgan to operate their business in a prudential way. Until we had the minor reforms of Dodd-Frank and the Corrigan Group before that, the dealers weren’t posting any margin with one another. It was all naked. And so the first thing that Corrigan did when he started getting people focused on this was to force the dealers to require minimum margins from one another. That was the problem. The systemic risk was actually among the big dealers. They dealt with that somewhat but look at Dodd-Frank, they didn’t touch the bilateral relationship between the client the dealer bank.

So if I am the customer, and I’m dealing with JPMorgan, I can’t go to any other bank because all these contracts are bespoked, they’re all different. I can’t get another bank to net me out, so that’s the problem. On an exchange, all contracts are fungible—I want to go long, I want to go short, whatever it is, I do my trade, I don’t even know who the other counterparty is because I’m dealing with the exchange.

Swaps were just a new way for banks to generate income, even as they became less and less relevant: “As the U.S. economy and especially Wall Street and the banks were less and less focused on funding and financing real economic activity jobs, factories, commerce, the rise of the ersatz virtual world of credit faults swaps and over-the-counter derivatives, all of these gray markets—that are unregulated, that are not traded on exchanges, that have no transparency—were really a way for banks to generate income because they could no longer make their money on the real economy,” says Chris. “And the Fed encouraged this. If you go back to the ‘80s, the LDC debt crises when a lot of the big U.S. banks like Citi almost failed, they realized that between technology, innovation, deregulation of markets, the profitability of the old banking business, at least as far as big banks were concerned, was ebbing. So the solution, if you will, was for the Fed to encourage things like Basel II, this whole global regulatory mirage that we have, and at the same time they said, “Oh, it’s okay for you to create off balance sheet entities, it is okay for you to trade these derivatives that are not at all regulated or subject to disclosure,” and the banks have done exactly that,” he explains.

What is the “Antidote” to this form of Greedy Bastardism? You want to have an exchange traded product, you want to have full public disclosure of all trading every day so we can see all prices for all trades, and you want to require physical delivery of the underlying asset,” says Chris. “In other words, you own a bond, a loan, it could be commercial paper, even a vendor. Let’s say you are big vendor and you have credit exposure with a bank and you want to hedge it. That would be okay, you could deliver the accounts receivable for your insurance payment. That’s what we need. It’s to re-link this derivative market with the real world. And then we’ve got something,” he explains.

For the full conversation, check out the transcript below:


- Meg Robertson is a digital producer for DylanRatigan.com.


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Reggie Middleton's picture

Congrats on the (anticipated) opening of your new bank fund.

Shizzmoney's picture

How about the Gaming Commission rules that CDSwaps are gambling, and therefore subject to tax and oversight by them?

They can't even get online poker regulated...and its a slam dunk (with the tax revenue it could provide), nevermind this.

GCT's picture

So what happens when Europe says a default is not a default and the CDS market is not going to work?  I think I understand the basics of a CDS thanks to this site and several articles.  If CDS is now worthless, is this the reason for the higher intrest rates on soverign bonds or bunds in Europe?  I am trying to put the puzzle together and could use some help or some guidance from some of you. 

anarchitect's picture

It's not a question of what Europe says but of how the CDS contract is worded. I would hope that anyone buying a CDS at this point would ensure that they're covered against haircuts and restructuring, not just outright defaults. This still leaves the problem of the CDS writer not being able to pay when the time comes. The absence of a clearinghouse greatly increases the risk of this occurring.

GCT's picture

Thanks anarchitect. 

So it is all about the legalise in the contract, even though the ISDA can make their own rules.  You can take this thru legal channels if the CDS is worded correctly. 

Heroic Couplet's picture

On PBS last night I heard some private bond holders got singed in the Greek problems. Excellent.

falak pema's picture

Using the CDSs to burn the Euro, is part of the current ongoing scam, perpetrated by the GS cabal, with their surrogate slaves who have been corralled through REGULATORY CAPTURE : THE S&P TYPE NOTATIONAL REGULATORS. They work for the Oligarchs.

This whole broken, corrupt market operates on regulatory capture and subsequent butt bashing of the people's wealth using these WMD of the financialized world. 

And its led to inevitable tipping point : the NEW Borgias, the Medicis and the Orsinis, now fighting for the pie of the financialized world from WS, the City, Frankfurt and Hong Kong. Greedy Bastards bringing the world down. The Euro and the USD are the symbols of this corrupt world and its fiat wealth.

NuYawkFrankie's picture

Re What is the "Antidote" to this form of Greedy Bastardism? You want to have an exchange traded product....


No Dylan - you are WRONG!

Are you completely oblivious to the fact that the whole purpose of these derivatives has been to skim, scam, finagle, undermine, cheat, extort, steal, and now collapse economies?

You might as well stipluate that henceforth hookers can only operate out of a nunnery! Either the beast will flee to more hospitable climes or, more likely, the nunnery will be debauched.


What is needed is a COMPLETE SEPARATION of commercial/retail banking - the Real Economy - from the parasitism & gaming of the system - derivatives being the current WMDs of choice. It is the assocation of this parasitism with traditional banking (which serves the Real Economy) that has been the convenient excuse/reason for the $13+ TRILLION - and counting - bailout of the parasites.

Once there is this separation, who gives a flying f*ck where/how "they" trade derivatives - they'll blow themselves up anyway... mercifully sooner, rather than later.

What is also needed is for the Wall St perps - who not only willfully wrecked the US economy but are also bringing down the global economy - is RICO prosecution, if not Nuremberg-type Trials, followed, at the very least, by life-imprisonment and confiscation of all assets.

You, Dylan, are part of the problem. Though masquerading as some sort of born-again reformer, no doubt having had a Damascene Conversion on a limo-driven ride to some 5-star restaurant in Midtown Manhattan, all you have done is confirm that, yes - 3 or 4 years after the horse has bolted - the barn does, in fact, appear to be empty!  Nevertheless, lets all re-arrange the bales of hay - and maybe everything will be OK?

You, Dylan, and your lackeys in the Finanacial Media have been nothing but cheerleaders/shills/apologists for the Wall St perps all these years. How come it took a guy like Matt Taibbi - who's not even a financial journalist - to dig out Wall St's dirt?

To avoid prosecution under Aiding & Abetting, either willfully or not, you should be barred - along with the even more egregiously toady & complicit Cramers, Bartiromos et al. of the world - from any further public commentary, as it places said public in immediate financial endangerment.

Thank you & have a Nice Day

tedstr's picture

Whoa Dude.  Tottaly amazing comment.  So true.

rufusbird's picture

Outstanding!...This is one to send out to people who need help understanding...

falak pema's picture

That such a scam could be invented by a reputable bank, is like the Catholic Church inventing the 'INDULGENCE' to allow 'greedy bastards' to go to heaven in the old days. This whole scheme works on ONE time honoured principle : REGULATORY CAPTURE.

If the Pope, scion of virtue, Vicar of God, is the perpetrator of the scam, betrayal of what he stands for as icon of 'fair value belief system', teachings of HIS lord Saviour,  then there is no hope for humanity except in 'Reform' and nailing the 95 articles of Martin Luther's Theses on the walls of city. As in those days, the Gutenberg press would ensure their dissemination to the population. Today it will be the same with the Internet. As this is the ultimate betrayal of what the 'banking church' stands for : FAITH in prudential management of other people's wealth.

Condemning this regulatory capture by the Oligarchs of our day, using the triple A bank vehicle to sell their modern INDULGENCE secretly to clients avid to be part of this sleight of devil's hand, is a travesty of justice; all the nation-state legal/democratic system stands for.

Burn down this capitalist church which has installed "regulatory capture" via CDS type instruments of this crooked, corrupt market.


theprofromdover's picture

I think this needs one of these Elliot Ness type switch and move ideas.

How about the Gaming Commission rules that this is gambling, and therefore subject to tax and oversight by them?

Jack Sheet's picture

Nice post ! More of this and shelve "Sol Sanders"

Grand Supercycle's picture

SP500 monthly chart remains bearish and USDX weekly remains bullish so it’s only a matter of time until the market makes its move.


ebworthen's picture

rcwhalen (and Dylan Ratigan) - Thank you for helping to expose some of the magnets under the roulette wheel called "Wall Street".

AndrewCostello's picture

This is just more proof that the entire system has become a paper fantasy.  We could end it all by separating physical and fantasy commodities once and for all - this would expose just how much of the economy is a fraud.




Balmyone's picture

When does the damn collapse start.

grovernors's picture

Traitors to te republic should be exiled.

"If any citizen of the United States shall accept, claim, receive, or retain any title of nobility or honour, or accept and retain any present, pension,office, or emolument of any kind whatever, from any emperor, king, prince, foreign power, or secret society, such person shall cease to be a citizen of the United States, and shall be incapable of holding any office of trust or profit under them, or either of them." http://www.tona2009.com
zorba THE GREEK's picture

By not allowing CDSs to trigger on 50% Greek default, the rules have changed and sovereign debt

will only find buyers in Central Banks and their minions. Monetization is the only answer for public debt now

that the public has no way to hedge.

FEDbuster's picture

No one likes to play games where the rules constently change.  GM bond holders was the final straw for me.  I took my bat, glove and ball and went home. 

BTW really enjoy Dylan's show most of the time, but only when he hosts it.  Wish he would have Kyle Bass on to discuse the Ponzi, and the investment world WROL.

Heyoka Bianco's picture

How do swaps differ from any other sort of fiat-based fuckery? The nominal need is "risk abatement", but since thatjust means finding the greater fool to pay off on default, the risk is unchanged: the folks with the resetting mortgage are no more likely to pay up because the loan originator found another brainless cow to milk.

Trading on an exchange hardly solves the problem. Just look at all the fiat money swirling (or circling the bowl) in the forex markets. Full faith and credit: like believing in the Great Pumpkin.


No Guarantees (In the Western World)



ItsDanger's picture

Problem really lies in that the institutions dont have the capital to back up any failure of a counterparty.  Since no one knows what each counterparty's true risk is, the whole system can fail.  CDS shouldnt exist without massive capital backing it up.  Failure of regulation which would need int'l cooperation with effective measures which is not likely.

iDealMeat's picture



CDO = insolvent

CDS =  insolvent


game over...

ItsDanger's picture

I was speaking to swaps as a whole not just CDS.  BTW, what is the C in CDO re: Greek bonds exactly when you have entities unilaterly writing down the face value of bonds?  Those are just DO.  A mortgage or lease would be a CDO (if properly documented)

Pythaes's picture

 "These are not transparent, because they are not traded on any public exchange. Lack of transparency means that no one, exactly, knows where the risk is or how much risk there is."

But when it's on a public exchange it is gambling....i fucking hate these guys....according to the media, its ALL gambling and its horrible for society...well guess what if you can play roulette in monte carlo or bet the ponys at the OTB, all that matters is that you have the balls to play.  newsheads are doing what they are doing for a reason. NO NUTS DYLAN!!! too bad 52 pieces of paper represent nothing but a way to burn money and time....and my 6 screen trading rig represents the ability to never have to fallback on a fucking dice throw

eatthebanksters's picture

Naked swaps are nothing but a bet, period.  There are two reasons that TPTB don't want these things traded on exchanges: 1. They would have to explain why gambling is suddenly legal outside of Vegas, 2. The price discovery from transparency created by an exchange would kill the values of this shit.  Whaddya think goes on? GS and JPM package this shit and sell it to suckers for 2x or 3x (or more than its worth)...when the folks need to unload it who do they go to since there is no exchange?  GS or JPM (oversimplified of course)...and what do these guy do?  They tell the suckers that the market conditions have changed and they buy the shit back at a fraction of what they originally sold it for.  Then they turn around and sell it to another sucker.  Any transparency would end this very lucrative scam.  This is the biggest bookie operation in the world and the funny thing is the money for the bets isn't even coming from people who are calling inbets...its coming from people who trust their money with these bastards.  Can you say MF Global.  Execute Corzine, that fucking swine!

AldousHuxley's picture

America is like Las Vegas....sin city in the middle of cultural wasteland. only thing it has got going is entertainment and gambling.....hollywood and wall st.


that's the truth.


how else can americans have high standard of living when there is a whole state education system denying evolution while asian countries are making advances in stem cell research?


consider yourself lucky you are not 150 IQ genius born in Iran that is about to get raped by 80 IQ US soldiers.

rocker's picture

Believe me, you have better odds at Las Vegas or the Race Track. At least you know your odds of winning.

Wall Street is a 100% rigged game.  Earnings and Valuations no longer apply. 

Cheyenne's picture

True but sad when you think about the realities of the OTB: on top of the 16% takeout on winners, there's the 20-25% takeout on exotics if they hit at over $600 at over 300-1 odds. Which is most $2 tri tickets when a 20-1 comes in on top. Signers charge 10%. So that's a 28-33% takeout for solid wins--and that's still better than the rigged casino called NYSE. Hell, in no casino I've ever been in do pocketsful of chips just vaporize, the way they did at MF Global. Holy shit. (This ignores, of course, well-crafted dime super tickets, which seem to have an uncanny tendency to come in at just under $600.)

Yeah, I'll stick with the OTB, thank you. You can spot the degerate gamblers there by gimp or by limp. On Wall Street, the gimps run the game.

ebworthen's picture

...and prettier Women and better drinks...

AldousHuxley's picture

true indeed.


where are the frequent investor/trader comps?


Odds at casinos are immune from central banksters manipulations although heavier tax burden on winnings vs long term cap gains.

jmc8888's picture

Dylan fucked up and said most of it netted out.  Guess he hasn't thought it through, it wasn't hard to figure it out.  Then of course, on top of that, he could of also read his ZH more often and read what they did so nicely on the subject.  It was quite intuitive before, but it's always good to see it layed out there for all to see.


The answer is Glass-Steagall and some of what Dylan says.  But the big nuke is Glass-Steagall, the howitzers which are important, but not as deciding, is what Dylan is advocating.



williambanzai7's picture

There are two salient points made:

1. The magnitude of the origination creates the TBTF phenomena on steroids.

2. The bespoke opacity kills competition and liquidity.

So we have these giant interlinked time bombs concentrated among a few taxpayer backed behemoths. 

In a sense it is similar to all the arguments about capitalism. Crony capitalism is not the capitalism everyone wants to revere.

Similarly, how can you discuss the social utility of a derivative instrument when the market is originated and dominated by bailout Queens. 

Moral hazard is insidious.

Our intelligence is insulted by the fact that we are asked to believe that a Wall Street monkey like Gensler is not going to do what the organ grinders order him to do.

GMadScientist's picture

Senate Ag Cmte trys patience of American taxpayer...did they vote against Gramm-Leech-Bliley?

OutLookingIn's picture

wb7 - Just love this;

"Our intelligence is insulted by the fact that we are asked to believe that a Wall street monkey like Gensler is not going to do what the organ grinders order him to do."

And of course the organ grinders monkey collects the money and funnels it back to the organ grinders!

What a great simile!

Mr Lennon Hendrix's picture

Pleaze don't uze so many big wordz, I getz confuzed

williambanzai7's picture

What?...I thought they were ingenious risk management tools just like Greenspan said.

Q: How could we have managed without them?

A: Look at the trajectory of the country since the dawn of these modern marvels of fraudlulent wonder and put 2 and 2 together.

covert's picture

sound fundamentals? not popular enough. "redistribution" of any kind is popular. nothing is quite so hated as a sound economic policy because, it leads to genuine financial justice.



willien1derland's picture

An extremely potent force Dylan Ratigan & Chris Whalen - now that is firepower! Great article! I would imagine the likes of GS & MS will fight tooth & nail to prevent these types of transactions from moving to an exchange traded format - Is there any action that you could recommend to influence such a change to occur? - Time to influence change Bitchez!

rocker's picture

Dylan left Fast Money when he realized on air that Goldman Sachs created synthetic credit default swaps and CDS with AIG that they were selling to clients.

The part that bothered Dylan was the FED Bailing out what GS and others knew were piles of shit sold to everybody in the world at leverage that they themselves could not cover.  Once Called Black Magic by Dylan himself.

It is nice to know that somebody had a heart at CNBC.  On the other hand we had scumbags like Cramer telling people to buy Bear Stearns @69.00

And then there was Joe Kernen who told Carl that "Bailing out the Banks was all Good".  Done on Air live for the world to see.

CNBC has to be one grade lower than Cow Shit right under Lloyd Blankfein and Neel Kashkari who did the dirty work for GS with Hank Paulson.

flattrader's picture

I admire Ratigan.

His vitriol can sometimes get in the way of what he's trying to explain.

He needs a good "straight man" like Robert Krulwich, who can make even the dumbest American feel smart while he's explaining complex issues.

Ratigan than then go nuclear AFTER Krulwich explains how everyone is getting screwed.