A Vigorous Defense of CDSs and Goldman

Download 2010-4-28 Holman Jenkins: Is Financial Innovation the Enemy

The CDO was not "designed to fail." The securities that failed were the simple, wholesome straightforward mortgages that the CDO "referenced," which were designed to extract a fair return from people who supposedly cherished their homes and would strive to pay their bills.

The CDO itself performed exactly as advertised: It paid off the winner of two opposing bets about whether large numbers of mortgage borrowers would default.

Nor was the trade the equivalent of "taking out fire insurance on your neighbor's house," at least in the sense that your intentions were different from what the insurer expected. Instead, it's like you and an insurance company having the following conversation:

You: "I think house X is going to burn down."

Insurance company: "We don't think it will burn down and we know more about houses than you do."

You: "It will burn down."

Insurance company: "Will not."

You and insurance company simultaneously: "Let's bet!"

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