We’ve all heard the term Credit Default Swap (CDS) but all we really know about them is they are humungous as a general rule and they can run into billions, perhaps trillions, of international currency units.
 
We’ve all read lots of stuff on them, for example, we know that a CDS is a form of insurance that is taken out to protect when the carpet is swept from under your feet.
 
Generally speaking, CDSs are probably good things. Suppose you are the organiser of the open air Battle symphony proms that are held across south east England at various venues throughout the summer. You hope to make a profit and indeed you will if the weather holds out. But suppose it pours with rain. You still have the orchestras to pay and the fireworks and the cannons and the soldiers and the Spitfire and everything, and you don’t want to be paying out of your own pocket. So what better way than to ask a bank to finance a CDS to cover your losses in the event that no one turns up due to bad weather?
 
It is easy to prove. You’re the bank manger and you like classical music in the open air while you’re eating strawberries and drinking champagne, so you can go along to the concert and enjoy it, especially since the premium you received for underwriting the CDS remains with the bank; means you’re in the money and you don’t have to pay out.
 
However, for anything else, when you think of CDS, think of porn.
 
The big question is who pays out when things go wrong?  Of course, while everything’s running smoothly, the holder of the CDS is laughing – he’s getting a nice fat monthly premium and everyone’s happy.
 
Cast your mind back to the 60s, In those days, there were no computers and pornography was illegal; we can all remind ourselves of the news reports when various shops in Soho were raided by the police and all that filthy stuff was confiscated and the culprits fined or sent to prison. Hell, even homosexuality was an offence in those days. Nowadays of course, it’s almost mandatory unless you want to get married.
 
The stereotype consumer of porn was a seedy looking middle aged man dressed in a rain coat receiving his fix in a brown paper bag from the owner of the corner shop – all very sordid and underground.
 
I am sure we all remember our first porno movie in 8mm in black and white where everything was shaky, the big question still unanswered – how on earth did that snotty nosed school kid manage to get hold of them.
 
All this was to change, and when the Internet finally got up and running in the early 90s, and its tentacles gradually extended to every corner of the globe, there was a potential audience of billions – that’s thousands of millions ready, willing and able to pay for porn, and as we know, porn became the most frequently visited web sites.
 
I am sure most of us remember that brief period in the 90s when some porn was freely available, but those websites were all eventually phased out and replaced with pay as you go.
 
Back in the 90s, it was clear that internet porn was a growth industry of gargantuan proportions. Manufacturing and development costs virtually zero, so the profits worldwide had to be astronomical. This was surely one major reason the world wide web came into existence. You can virtually bank on it that there’s one thing 6 billion people all like, and that is pornography – to suit all tastes and flavours.
 
The first call of business – remove the illegal nature of pornography – make it available to everyone so long as it can be charged.
 
Enter CIA who ensure that any freely available internet porn sites vanish overnight, and all paying porn websites are owned by them. While not proven beyond all doubt, it is rumoured that CIA’s real reason for existence is distribution world wide of illicit drugs. Look at their description of Afghanistan heroin on their fact book; it reads like a company report. If drugs, why not porn?
 
Of course, this did not please the other porn webmasters, so what do you think their response might have been? How about flooding the Internet with viruses, Trojan horses, worms etc.
 
Now this is when it starts to get interesting. Put the word about that here we have an unlimited, every growing source of income for grand projects that don’t qualify for public finance, but are very exciting and useful, like searching for Higgs boson, making commercial exploitation of the moon a reality by 2020, well, you name it, projects that once they got off the ground would become permanent additions to the human landscape,
 
So, physicists and scientists might have got very excited. True, the proceeds would be coming from pornography, but it’s a source of income that can only get bigger, outgoings are minimal and when you think of the benefits this kind of research can bring Mankind, well it’s got to be worth taking seriously.
 
Thus, loans are made available by the money markets for projects of this nature, projects that need guaranteed capital for the next 100 years or so.
 
The physicists and scientists are happy to go ahead with their projects, but owing to the nature of these projects, they do actually need some kind of guarantee or security that once the money starts rolling in, under no circumstances can it ever stop. And this regular, ongoing influx of capital is crucially important.
 
So what we all need is a cast iron, rock solid guarantee, but where to get it from?
 
There is one source of income that never stops and that’s the tax revenues paid by the population into the privately owned Inland Revenue bank accounts, so who better than Governments to guarantee these loans into perpetuity. Thus, Governments are the institutions who take out these credit default swaps, and it is therefore Governments that become liable if the original line of credit dries up.
 
But it’s easy money. The governments get big fat monthly premiums, people will always enjoy porn so porn websites truly are a source of never ending and forever growing revenue.
 
Thus, the money boys must have visited lots of governments and persuaded them to sign up for these credit default swaps – so that all countries can take pride in assisting grand projects like space exploration, deeper understanding of physics and anything else you can name, but let’s not tell anyone that the underlying source of credit is derived from pornography.
 
Even better, these CDSs are purchased over-the-counter meaning they can be hidden from public scrutiny, so no one’s the wiser. In fact, I’ll wager that they are deliberately kept secret because it is government that becomes the underwriter, the lender of last resort.
 
Furthermore, it’s possible that participating governments may well have been taking out credit default swaps on the same basic underlying line of credit. Or you might have had some savvy participants who say we will only cover the Greek porn revenues if you’re Greek, or in Italy the Italian porn revenues, or the UK, or the US
 
Thus, as soon as all these CDS agreements have been put in place, financial meltdown can now begin, as it surely did when a certain subliminal message was received by all computer users which basically said – why should people have to pay for porn, let’s give it to them for nothing - thus marking the end of PAYW porn, the line of credit drying up overnight, and the internet all of a sudden being flooded with free porn on websites that I’ll wager were also all owned by CIA.
 
News of this first hit the headlines when Alistair Darling visited the offices of the Royal Bank of Scotland and the chairman says: ‘take a look at these bank statements Alistair, there’s no more money coming in.
 
Chairman: The money’s all dried up Alistair, we can now watch porn for nothing. So you have to pay up. £25 billion and that’s just for starters. Next year, you have to pay more and the year after that.
 
Ok, let’s now go see Hank Poulson and tell him the bad news.. There’s a lot of people watch porn in the US so the US Treasury has a big bill to foot. And the same goes for Greece and Italy etc.
 
So, who was Alistair Darling? Was he an arrogant, yet ignorant, patsy who was suckered into participating in the ultimate ponzi scheme, or was he a genius who masterminded the whole thing and orchestrated the biggest movement of public funds into private hands over the longest period of time?
 
Actually, Hank Poulson probably knew about it all along. In fact, it was probably he who thought the whole thing up in the first place.
 
So this is where you can have your cake and eat it. We all get to watch free porn and the taxpayer ends up paying for all these exotic, fabulously expensive projects. The number of monthly premiums on the CDS actually paid would have been kept to an absolute minimum, since the people who got this project going were in all likelihood the same people who ended it.
 
That being said, the question on every one’s lips now is who is paying the new lot of porn stars to bonk for zonk?
 
One has to appreciate the genius behind this. I hope the above explains clearly exactly what a credit default swap is.