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Those Damned Derivative Thingies

July 7, 2009
Chris Clancy
7/6/2009

This essay is a story about insurance, or rather, a story about a type of insurance policy which underwent a mutation. This mutation was not spontaneous – it was engineered. It was one of the biggest scams ever perpetrated.

Paradoxically, the problem was that it worked too well and just got too big.

I hope you stay with the story until its denouement. Maybe you’ll be gobsmacked. If it moves you to go out and start looking for suitable lamposts – then it’s understandable.

When a business makes a loan to another party it can insure against the risk of default. This would be prudent behaviour if the lender had concerns about the borrower not repaying everything which was due.

Insurance companies, like all industries, work to a set of fundamental principles. Two of their most fundamental principles are indemnity and insurable interest.

The story continues …..

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