How We Learned to Stop Worrying and Love Credit Default Swaps

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Photo: Courtesy Cheeseroc's Flickr

Just when it seems like the news can't get any worse, it does. The stock market's got the shakes again, and the thing that's supposed to save us all is a colossal "bad bank," as if we didn't have enough of those. But amid the epic destruction of wealth that defines this moment, the recovery is underway, even if it's so feeble and small you need a microscope to see it. We know because that's what the Downtownaround has been using to closely examine the news and find causes for optimism. The latest batch includes a winning hedge-fund manager who sees a future for the U.S. economy, a blowout earnings report from a company that is not in the repo business and job opportunities in the unlikeliest of places.

•To the extent that credit default swaps are on your list of things to worry about — and why wouldn't they be, as they are commonly described as "an unregulated market with $72 trillion of notional value" — you can cross them off your list. The gist of this lengthy treatise on CDS's is that they've been wildly distorted in the media as a ticking time bomb, even though they are not meaningfully different from other kinds of derivatives and are often used effectively and wisely as hedging devices. Phew! [RGE Monitor]

• Until further notice, you may also cross off LIBOR, the TED spread, and the
A2/P2 spread. [Calculated Risk]

• And the concept of "moral hazard." [New Yorker]

• John Paulson may act like the world is going to end, what with his bearish pronouncements about how the Worst Is Yet to Come, but he doesn't really mean it. Sure, the now-mythic (and oddly cuddly) hedge-fund manager still doesn't like the financial sector and does not believe we've yet reached a bottom in the equities market. But as opposed to last year, he sees very selective opportunities in the distressed debt market, which is to say that the economy is not going entirely to hell. [DealBook/NYT]

• Fortified wine, handguns, and Krugerrands aren't the only things flying off the shelves. With a strong 2008 and growth over the dismal Christmas season, Amazon, of all places, has shown it's possible to do more than survive in this climate. [Bloomberg]

• Laggardly trading of Wal-Mart and increased spending on things like construction equipment and road paving — in anticipation of increased infrastructure spending thanks to the government's stimulus plans — means some investors might — we stress might — be rediscovering their appetite for risk. [Barrons]

• Even at the extreme depths of the economic food chain in America, LIFE GOES ON. Braddock, Pennsylvania, has a kick-ass mayor who has inspired a form of urban pioneering that makes Bushwick look seriously junior varsity. [NYT]

• If you believe the political rhetoric, home foreclosures represent the shattering of the American dream. But what if getting thrown out of your home and being forced to rent a place crosstown really is the best way to relieve most Americans of unmanageable burdens and allow them to get on with their lives? [WSJ]

• Proof that irony is still undead: Not only is a job at Lehman Brothers considered good, stable work, but the bankrupt firm has twice the level of cash on hand than it did when it was "solvent." Capitalism lives! [WSJ]