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Mathematician, and developer of the BitTorrent algorithms, and diagnosed genius Bram Cohen of Bram Cohen’s Journal asked one of those so-simple-only-a-genius-asks-them question about the current financial meltdown/bailout business.

the credit default swap market is many times the size of the actual mortgage market. How’d that happen? Well, overzealous investors ran out of actual mortgages to invest in, so they simply started placing side bets on how the mortgage market would do, totally many times how big the actual market underneath is. AIG is in a position of being the biggest insurer of the garbage. These two facts put together make for an interesting possible scenario. Since the amount of money on the line is greater than the actual size of the underlying market, AIG could potentially agree to cover every mortgage company’s loss in any short sale (a short sale is where the mortgage company agrees to forgive part of a loan to make a sale happen, as a way of avoiding forecloser). That would immediately result in the number of foreclosures being near zero, and AIG would magically have made it so it didn’t have to pay out on any of its side bets.

Read the context leading to his question here.

Given the division of ideas between whether bailouts should benefit a) financial markets or b) end users of mortgage credit, and given that the meltdown really does have more to do with the side bets described in Cohen’s introduction to the question, Michael Lewis’s analysis in Portfolio last week, and Matt Yglesias’s similar explanation today it does seem like an interesting way to kill at least two birds with one (um?) fire-extinguisher.

Yeah, this post isn’t even remotely related to sex, relationships, or gender**... except maybe in the sense that if the meltdown continues we’re all screwed. But Cohen’s question has been nagging at me enough that I figured I might as well get it out of my system. And it’s not like he blogs about financial markets all that much either.

[** Of course money problems are actually a huge stressor in most relationships. —fl]