Credit Default Swaps and Mortgage Backed Securities: a Primer.

I’ve previously noticed Mark Labaton’s writing. Labaton is a lawyer in LA, and he writes with the kind of clarity and precision that is crucial to effective lawyering. In the most recent issue of LA Lawyer (pdf), he applies those writing skills — in the article entitled “Swap Meet” — to explaining “derivatives,” those financial instruments central to our current economic disaster. I’ve tried to do a similar thing here a few times (here, for example), but Labaton’s account is much more comprehensive. It’s an important piece. I can’t say enough to my students that they have to reject any idea that the stuff they have to face is too complicated for them to understand. We were told again and again that credit default swaps were too complicated to understand (see below, from a CNBC Telecast in November 2006). That’s hogwash. Accepting the myth our financial markets were dealing with risks too complicated for anyone to understand (even the most active participants in the markets!) put us in this mess an is keeping us from getting out of it as quickly or effectively as we might. Labaton not only understands this point, he also provides a very useful explanation for the rest of us.