Tail Risk Killers: How Math, Indeterminacy, and Hubris Distort Markets

CHAPTER 29Are Swaps “Natural”?: Market Structure and Vietnamese Sandwiches

Some of the problems with swaps are independent of politics and policy. So it is opportune to leave swap politics aside for a time. One needs to separate the cronyism and potential wholesale corruption of political institutions by the financial entities that use swaps and the swaps themselves. The apparent corruption has done far deeper damage to modern finance than a mere political blame game that covers leniency and missteps. It leads to a common belief that credit-default and interest-rate swaps are artificial creations that fill no particular human need except greed. They are thought of as a modern equivalent of some financial plague, a blight on human history that ...