Credit Default Swap - CDS
You’re most likely here because a professor assigned you a report on the 2008 Financial Crisis. You found yourself reading about the credit crisis, and ended up clicking on credit default swaps for any clue on what the heck these things actually are. It was bound to happen.
So...let’s try to keep it simple.
You loan $1,000 to a guy you met at a bar (maybe not a 100% sober decision) with a high interest rate. Now you’re regretting the decision. So you tell the bartender that you’re willing to pay him $20 a month to guarantee the loan in the event that the person defaults. You'll pay $20 a month for a specified period of time, and he will pay off the loan to you in the event that the barfly defaults.
That's the basis of a credit default swap. It’s a form of insurance.
During the financial crisis, companies that bundled mortgages purchased credit default swaps from companies to insure those loans. There was just one problem. One company, AIG, insured an overwhelming amount of these swaps in order to collect the premiums. When the entire housing market sunk and millions of Americans failed to pay their loans, an incredible number of mortgages went into default. As a result, all of the financial companies that had purchased insurance in the form of CDS were making claims all at the same time. This resulted in a $182 billion bailout from the U.S. government for the insurance company.
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Finance: What is the Credit Rating Agenc...4 Views
Finance allah shmoop what is the credit rating agency reform
act of two thousand six otherwise known as crack are
out out something like that All right yeah that's How
the real pros said anyway this act was meant to
improve the quality of company credit ratings like a blindfold
and dartboard should not be involved in making up are
you know coming up with corporate credit ratings Well the
law was ironically enacted in the hope that we would
avoid nightmares like the subprime mortgage crisis that almost brought
down the finances of while the entire country in world
And yes it worked in the same way that a
scale works in an embarrassing episode of the biggest loser
The idea was that the big three agencies moody's s
and p and fitch were colluding with each other and
raiding every security as a okay sort of the same
way wall street cell site analysts were leaned upon in
the nineties by bankers who paid them to rate every
company of strong by so that the companies would favor
the investment banks when doing lucrative secondary offerings and other
personal wealth management services for the founders and senior executives
Newly ridge from you know aipo booty The big three
then produced a product that wasn't reflective of the real
risks inherent in the marketplace Basically they had been labeling
pink slime and hot dog meat as great a sirloin
Yeah well the act made it much easier for smaller
firms to compete for business by doing high quality research
and not being afraid to give bad ratings tow bad
money butchers will The credit rating agency reform act of
o sixth gives both businesses and the government the tools
they need to fight off the shady hucksters of the
world And make sure the pink slime never you know 00:01:55.443 --> [endTime] such a cz your plate financially
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