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« Previous Entry | Main | Next Entry » Can you explain, simply, what a credit default swap is? Name:
Caroline Miller
Question/Comment: Can you explain, simply, what a credit default swap is? Paul Solman: I sure hope so. Basically, a credit default swap or "CDS" is an insurance contract to protect against bankruptcy. Say you own a lot of Ford Motor Co. bonds, which Ford gave you in exchange for lending money to it. But you're afraid Ford might go bankrupt, and not have enough money to pay back its bondholders. You can then buy a CDS that would pay you if Ford "defaulted" on its debts. So you've swapped a small amount of money for a promise to be paid a much larger amount of money if a disaster occurs. Just as if you'd paid a premium on home insurance to protect against a disaster like the house burning down. There's lot more to it, of course. Editor's Note: For more on credit default swap check out Paul's Oct. 7 segment on the subject. -- Posted October 6, 2008 | Comments (3) | Permalink
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I don't think you should call a swap the same as insurance. As I understand a swap; it was created to avoid the regulation of true insurance. It was a way they could make money by promising to assume the risk, without having to maintain the cash assets of true, regulated insurance. I do not think the greed factor in all of this should be underplayed.
There must have been companies and/or people that have made billions of dollars with all this mess going on - considering that $700B will make a little dent in geting the problem solved. Why isn't the media trying to root out who swindled America????
Check out the transcript to the 60 minutes episode from Sunday night. That's where they go into detail about the $60 trillion dollar credit default swap nonsense that cascaded this mess. If they had shown this before congress voted, would they have passed the bailout.
A Look At Wall Street's Shadow Market - Oct. 5, 2008
http://www.cbsnews.com/stories/2008/10/05/60minutes/main4502454.shtml