Over-Inter-Connected

Insurance Deals Spread Pain of U.S. Defaults World-Wide - WSJ.com

Ten thousand miles away, at New York investment firm ICP Capital, hedge-fund manager William Gahan is reaping big gains on Mr. McCormack's predicament.

The fortunes of the two men are connected through an investment known as a "synthetic collateralized debt obligation." Between 2005 and 2007, the Parkes local council put more than A$13.5 million ($9.3 million) of its savings into synthetic CDOs. The investments offered an attractive income and a gold-standard credit rating -- in return for providing a sort of insurance on the debt of hundreds of mostly U.S. companies.

Now, though, if even a handful of those companies renege on their debts, Parkes will have to cough up as much as A$12 million to honor the insurance commitments it made. That's been a boon for Mr. Gahan, who used financial products to place bets against many of the same companies.

But it would deprive Parkes of a big chunk of the money it needs to rebuild its water-supply system amid an enduring drought. "It's going to be a long, hard ride," says Mr. McCormack, 60 years old, who has run the Parkes council for 18 years.

You could say that this current recession is a clear demonstration of how little we understand the impacts of globalization. You could also say a lot about the human condition oft known as greed.