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Wednesday, February 20, 2008

GM Watch: Credit Default Swaps

by Calculated Risk on 2/20/2008 02:20:00 PM's Felix Salmon takes his turn at correcting the NY Times' Gretchen Morgenson, this time with regards to her article on credit default swaps. (hat tip Martin)

From Salmon: A Misleading Chart on Credit Default Swaps

This graphic ... from Gretchen Morgenson's front-pager in the NYT ... shows the market in credit default swaps, at $45.5 trillion, dwarfing the markets in U.S. stocks ($21.9 trillion), mortgage securities ($7.1 trillion), and U.S. Treasuries ($4.4 trillion).

Morgenson's article makes it clear that it's reasonable to directly compare market sizes like this. Indeed, she refers to CDSs as "securities" in the third paragraph of her piece:
The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion -- roughly twice the size of the entire United States stock market.
But of course a credit default swap is not a security, it's a derivative. The $45.5 trillion is a notional amount; the size of the stock market is a hard valuation. There's an enormous difference.

Morgenson is right that there are problems in the CDS market. But she over-eggs her pudding so much that it's very hard to separate the good points from the bad.
The bad news is there are serious issues with the CDS market. The good news is we've outsourced the GM Watch feature!